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| | 
| | 
| | 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

|                                                 |  |                                                                                             
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------
|þ                                                |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                
|For the fiscal year ended: December 31,
    2003

Commission File Number 1-1143

Inco Limited

(Name of Registrant as specified in its
charter)


|                                                                                                          |  |                                         
|--------------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Canada                                                                                                    |  | 98-0000676                              
|(Jurisdiction of incorporation)                                                                           |  | (I.R.S. Employer
    Identification No.)
|                                                                                                         
|145 King Street West, Suite 1500
    Toronto, Ontario, Canada(Address of principal executive
    offices) |  | M5H 4B7(Postal Code)                    

(416) 361-7511

(Telephone number)


Securities registered pursuant to
Section 12(b) of the Securities Exchange Act of 1934 (the
Act):

|                               |  |                                           |                          | 
|------------------------------ |  | ----------------------------------------- | ------------------------ | 
|Title of Each Class            |  | Name of Each Exchange on Which Registered
|                               |  |                                          
|Common Shares                  |  |                                           | New York Stock Exchange* | 
|Stock Purchase Rights          |  |                                           | New York Stock Exchange | 
|Common Share Purchase Warrants |  |                                           | New York Stock Exchange | 

The Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Act during the preceding
12 months, and (2) has been subject to such filing
requirements for the past 90 days.

The Registrant is
an accelerated filer (as defined in Rule 12b-2 under the
Act).

As of June 30,
2003, the aggregate market value, based upon the closing sale
price of the Common Shares on the New York Stock Exchange, of
the Registrants voting shares held by non-affiliates
equaled $3,951 million.§

As of
February 20, 2004, 187,300,108 Common Shares
(including non-voting fractional interests aggregating 5,096
Common Shares) of the Registrant were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the
Registrants proxy circular and statement dated
February 20, 2004 for the 2004 Annual and Special Meeting
of Shareholders of the Registrant are incorporated by reference
in Part III of this Report to the extent set forth in
Items 10, 11, 12 and 14 hereof.



---



|  |                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | In addition, the Common Shares are listed on the
    Toronto and London stock exchanges and are traded on certain
    other exchanges principally through independent arrangements
    made by securities dealers.



|  |                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------
| | In addition, the Stock Purchase Rights and the
    Common Share Purchase Warrants are listed on the Toronto Stock
    Exchange.
| 
|§ | Unless otherwise stated, all dollar amounts in
    this Report are expressed in United States currency.                        



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##### Table of Contents










INDEX TO INCO LIMITED

2003 ANNUAL REPORT ON FORM 10-K


UNLESS OTHERWISE STATED, ALL DOLLAR AMOUNTS IN
THIS REPORT

ARE EXPRESSED IN UNITED STATES
CURRENCY


|                                                       |                                                               |                                               |                                                                                  |   |    |    | 
|------------------------------------------------------ | ------------------------------------------------------------- | --------------------------------------------- | -------------------------------------------------------------------------------- | - | -- | -- | 
|Item                                                   |                                                               | Page                                         
|                                                       |                                                               |                                              
|PART I                                                
|1. and
    2.  Business and Properties of Inco Limited |                                                               |                                               | 1                                                                                |  
|                                                       | Introduction                                                  |                                               |                                                                                  | 1 |   
|                                                       | Availability of Documents                                     |                                               |                                                                                  | 2 |   
|                                                       | Cautionary Statement
    Regarding Forward-Looking Statements |                                               |                                                                                  | 3 |   
|                                                       | Description of Business                                       |                                               |                                                                                  | 4 |   
|                                                       |                                                               | Sales                                         |                                                                                  |   | 4  |   
|                                                       |                                                               | Deliveries                                    |                                                                                  |   | 4  |   
|                                                       |                                                               | Prices                                        |                                                                                  |   | 5  |   
|                                                       |                                                               |                                               | Nickel                                                                           |   |    | 5  | 
|                                                       |                                                               |                                               | Copper                                                                           |   |    | 5  | 
|                                                       |                                                               |                                               | Other Metals                                                                     |   |    | 6  | 
|                                                       |                                                               | Operating Results                             |                                                                                  |   | 6  |   
|                                                       |                                                               | Customers                                     |                                                                                  |   | 6  |   
|                                                       |                                                               | Competitors                                   |                                                                                  |   | 7  |   
|                                                       |                                                               | Inventories                                   |                                                                                  |   | 7  |   
|                                                       |                                                               | Nickel Unit Cash Cost of
    Sales            |                                                                                  |   | 7  |   
|                                                       |                                                               | Business Segment
    Information              |                                                                                  |   | 9  |   
|                                                       |                                                               | Nickel                                        |                                                                                  |   | 9  |   
|                                                       |                                                               |                                               | Applications for Nickel                                                          |   |    | 9  | 
|                                                       |                                                               |                                               | Historical Review of the
    Nickel Industry; Recent Industry Conditions         |   |    | 10 | 
|                                                       |                                                               |                                               | Participants in the Nickel
    Industry                                          |   |    | 14 | 
|                                                       |                                                               |                                               | Incos Position in the
    Nickel Industry                                       |   |    | 15 | 
|                                                       |                                                               |                                               | Inco Special Products                                                            |   |    | 16 | 
|                                                       |                                                               | Copper                                        |                                                                                  |   | 16 |   
|                                                       |                                                               | Other Primary Metals and
    Related Products |                                                                                  |   | 17 |   
|                                                       |                                                               | Mining and Production                         |                                                                                  |   | 18 |   
|                                                       |                                                               |                                               | General                                                                          |   |    | 18 | 
|                                                       |                                                               |                                               | Capital Expenditures                                                             |   |    | 21 | 
|                                                       |                                                               |                                               | Mining                                                                           |   |    | 22 | 
|                                                       |                                                               |                                               | Concentrating, Smelting and
    Refining                                         |   |    | 25 | 
|                                                       |                                                               | Ore Reserves and Mining
    Rights            |                                                                                  |   | 26 |   
|                                                       |                                                               |                                               | Ore Reserves                                                                     |   |    | 26 | 
|                                                       |                                                               |                                               | Mining and Other Rights                                                          |   |    | 32 | 
|                                                       |                                                               | PT International Nickel
    Indonesia Tbk     |                                                                                  |   | 35 |   
|                                                       |                                                               |                                               | General                                                                          |   |    | 35 | 
|                                                       |                                                               |                                               | Contract of Work Extension
    and Expansion of Facilities
    Completed in 1999 |   |    | 37 | 
|                                                       |                                                               |                                               | Operations                                                                       |   |    | 39 | 
|                                                       |                                                               |                                               | Sales                                                                            |   |    | 40 | 

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|                          |                                         |                                                                         |                                                                  |    |    |    | 
|------------------------- | --------------------------------------- | ----------------------------------------------------------------------- | ---------------------------------------------------------------- | -- | -- | -- | 
|Item                      |                                         | Page                                                                   
|                          |                                         |                                                                        
|                          | Goro Nickel S.A.                        |                                                                         |                                                                  | 40 |   
|                          | Voiseys Bay Nickel
    Company Limited |                                                                         |                                                                  | 42 |   
|                          |                                         | Voiseys Bay Deposit                                                    |                                                                  |    | 42 |   
|                          |                                         | Environmental Review
    Process                                        |                                                                  |    | 43 |   
|                          |                                         | Negotiations with Aboriginal
    Groups                                 |                                                                  |    | 44 |   
|                          |                                         | Negotiations with the
    Provincial Government                         |                                                                  |    | 45 |   
|                          |                                         | Project Phases                                                          |                                                                  |    | 46 |   
|                          |                                         | Asset Impairment Charge                                                 |                                                                  |    | 47 |   
|                          | Exmibal                                 |                                                                         |                                                                  | 47 |   
|                          | Exploration and Project
    Development |                                                                         |                                                                  | 47 |   
|                          | Research and Development                |                                                                         |                                                                  | 52 |   
|                          | Metals Recycling                        |                                                                         |                                                                  | 53 |   
|                          | Environment, Health and
    Safety      |                                                                         |                                                                  | 53 |   
|                          |                                         | SO 2Emissions                                                           |                                                                  |    | 53 |   
|                          |                                         |                                                                         | Sudbury                                                          |    |    | 53 | 
|                          |                                         |                                                                         | Thompson                                                         |    |    | 55 | 
|                          |                                         | Port Colborne and Sudbury
    Soils                                     |                                                                  |    | 55 |   
|                          |                                         |                                                                         | Port Colborne                                                    |    |    | 55 | 
|                          |                                         |                                                                         | Sudbury                                                          |    |    | 58 | 
|                          |                                         | Decommissioning and
    Reclamation                                     |                                                                  |    | 59 |   
|                          |                                         | Revegetation Programs                                                   |                                                                  |    | 59 |   
|                          |                                         | PT Inco                                                                 |                                                                  |    | 60 |   
|                          |                                         | Future Removal and Site
    Restoration; Closure and Post-Closure Plans |                                                                  |    | 60 |   
|                          |                                         | Health and Safety                                                       |                                                                  |    | 63 |   
|                          |                                         |                                                                         | MITE Research Network                                            |    |    | 63 | 
|                          |                                         |                                                                         | Diesel Particulate Matter                                        |    |    | 63 | 
|                          |                                         |                                                                         | WSIB Occupational Disease
    Policies                           |    |    | 64 | 
|                          |                                         |                                                                         | Worker Safety                                                    |    |    | 65 | 
|                          |                                         | Regulation of Nickel and
    Other Nonferrous Metals                    |                                                                  |    | 66 |   
|                          |                                         |                                                                         | Occupational Exposure Limits
    (OELs) in Canada                |    |    | 66 | 
|                          |                                         |                                                                         | Occupational Exposure Limits
    (OELs) in the U.S. and the U.K. |    |    | 67 | 
|                          |                                         |                                                                         | U.S. Environmental
    Regulatory Actions                        |    |    | 67 | 
|                          |                                         |                                                                         | Canadian Environmental
    Protection Act                        |    |    | 68 | 
|                          |                                         |                                                                         | California Regulatory
    Actions                                |    |    | 69 | 
|                          |                                         |                                                                         | Right-to-Know Legislation                                        |    |    | 70 | 
|                          |                                         |                                                                         | Harmonization of
    Classification and Labeling of Chemicals    |    |    | 70 | 
|                          |                                         |                                                                         | European Union Actions                                           |    |    | 70 | 
|                          |                                         |                                                                         | WHO Drinking Water
    Guidelines                                |    |    | 73 | 
|                          |                                         | Other Environmental Control
    Regulations                             |                                                                  |    | 73 |   
|                          |                                         | Environment, Health and
    Safety Audits                               |                                                                  |    | 74 |   
|                          |                                         | Environmental and Health
    Management Systems                         |                                                                  |    | 74 |   
|                          | Employees                               |                                                                         |                                                                  | 75 |   
|Miscellaneous Investments |                                         |                                                                         | 75                                                               |   
|Other Information         |                                         |                                                                         | 76                                                               |   

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|                                                                                                                                                     |                                                                        |                                                           |                                                       |                                                |    |     |     | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | --------------------------------------------------------- | ----------------------------------------------------- | ---------------------------------------------- | -- | --- | --- | 
|Item                                                                                                                                                 |                                                                        | Page                                                     
|                                                                                                                                                     |                                                                        |                                                          
|                                                                                                                                                     | Shareholder Rights Plan                                                |                                                           |                                                       | 76                                             |   
|3.  Legal
    Proceedings                                                                                                                            |                                                                        |                                                           | 78                                                    |                                               
|4.  Submission of
    Matters to a Vote of Security Holders                                                                                          |                                                                        |                                                           | 78                                                    |                                               
|Executive Officers of Inco
    Limited                                                                                                               |                                                                        |                                                           | 79                                                    |                                               
|                                                                                                                                                    
|PART II                                                                                                                                             
|5.  Markets for
    Inco Limiteds Common Shares, Related Shareholder Matters
    and Inco Limiteds Issuances or Purchases of Equity
    Securities |                                                                        |                                                           | 81                                                    |                                               
|                                                                                                                                                     | Common Shares                                                          |                                                           |                                                       | 81                                             |   
|                                                                                                                                                     |                                                                        | Market Information                                        |                                                       |                                                | 81 |    
|                                                                                                                                                     |                                                                        | Holders of Common Shares                                  |                                                       |                                                | 81 |    
|                                                                                                                                                     |                                                                        | Dividends                                                 |                                                       |                                                | 81 |    
|                                                                                                                                                     |                                                                        | Common Share Purchase
    Warrants                        |                                                       |                                                | 82 |    
|                                                                                                                                                     |                                                                        | Other Information                                         |                                                       |                                                | 82 |    
|                                                                                                                                                     | Class VBN Shares                                                       |                                                           |                                                       | 83                                             |   
|                                                                                                                                                     | Preferred Shares                                                       |                                                           |                                                       | 83                                             |   
|                                                                                                                                                     |                                                                        | Certain Provisions of the
    Preferred Shares as a Class |                                                       |                                                | 83 |    
|                                                                                                                                                     |                                                                        |                                                           | Issuable in Series                                    |                                                |    | 83  |    
|                                                                                                                                                     |                                                                        |                                                           | Priority                                              |                                                |    | 83  |    
|                                                                                                                                                     |                                                                        |                                                           | Creation and Issue of
    Additional Preferred Shares |                                                |    | 83  |    
|                                                                                                                                                     |                                                                        |                                                           | Class Voting Rights                                   |                                                |    | 83  |    
|                                                                                                                                                     |                                                                        |                                                           | Modification                                          |                                                |    | 84  |    
|                                                                                                                                                     |                                                                        | Series E Preferred
    Shares                             |                                                       |                                                | 84 |    
|                                                                                                                                                     | Securities Authorized for
    Issuance Under Equity Compensation Plans |                                                           |                                                       | 85                                             |   
|                                                                                                                                                     | Other Information                                                      |                                                           |                                                       | 85                                             |   
|6.  Selected
    Financial Data                                                                                                                      |                                                                        |                                                           | 87                                                    |                                               
|7.  Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations                                                    |                                                                        |                                                           | 90                                                    |                                               
|                                                                                                                                                     | Overview                                                               |                                                           |                                                       | 90                                             |   
|                                                                                                                                                     |                                                                        | Nature of our Business                                    |                                                       |                                                | 90 |    
|                                                                                                                                                     |                                                                        | Key Factors Affecting our
    Business                    |                                                       |                                                | 91 |    
|                                                                                                                                                     |                                                                        |                                                           | 2003 Highlights                                       |                                                |    | 93  |    
|                                                                                                                                                     |                                                                        |                                                           | 2002 Highlights                                       |                                                |    | 96  |    
|                                                                                                                                                     | Results of Operations                                                  |                                                           |                                                       | 97                                             |   
|                                                                                                                                                     |                                                                        | 2003 Compared with 2002                                   |                                                       |                                                | 97 |    
|                                                                                                                                                     |                                                                        |                                                           | Earnings Summary                                      |                                                |    | 97  |    
|                                                                                                                                                     |                                                                        |                                                           | Nickel Production                                     |                                                |    | 97  |    
|                                                                                                                                                     |                                                                        |                                                           | Copper Production                                     |                                                |    | 98  |    
|                                                                                                                                                     |                                                                        |                                                           | Net Sales                                             |                                                |    | 98  |    
|                                                                                                                                                     |                                                                        |                                                           | Realized Prices                                       |                                                |    | 98  |    
|                                                                                                                                                     |                                                                        |                                                           | Deliveries and Net Sales by
    Product               |                                                |    | 99  |    
|                                                                                                                                                     |                                                                        |                                                           | Costs and Expenses/ Other
    Income                  |                                                |    | 100 |    
|                                                                                                                                                     |                                                                        |                                                           |                                                       | Cost of Sales and Other
    Operating Expenses |    |     | 100 | 
|                                                                                                                                                     |                                                                        |                                                           |                                                       | Depreciation and
    Depletion                 |    |     | 100 | 
|                                                                                                                                                     |                                                                        |                                                           |                                                       | Selling, General and
    Administrative        |    |     | 101 | 
|                                                                                                                                                     |                                                                        |                                                           |                                                       | Research and Development                       |    |     | 101 | 

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|                                                |                                                        |                                      |                                                |     |     |     | 
|----------------------------------------------- | ------------------------------------------------------ | ------------------------------------ | ---------------------------------------------- | --- | --- | --- | 
|Item                                            |                                                        | Page                                
|                                                |                                                        |                                     
|                                                |                                                        |                                      | Exploration                                    |     |     | 101 | 
|                                                |                                                        |                                      | Currency Translation
    Adjustments           |     |     | 101 | 
|                                                |                                                        |                                      | Interest Expense                               |     |     | 101 | 
|                                                |                                                        |                                      | Goro Project Suspension
    Costs              |     |     | 101 | 
|                                                |                                                        |                                      | Other Income, Net                              |     |     | 102 | 
|                                                |                                                        |                                      | Income and Mining Taxes                        |     |     | 102 | 
|                                                |                                                        |                                      | Minority Interest                              |     |     | 102 | 
|                                                |                                                        |                                      | Nickel Unit Cash Cost of
    Sales             |     |     | 102 | 
|                                                |                                                        |                                      | Allowance for doubtful
    accounts            |     |     | 103 | 
|                                                |                                                        |                                      | Energy Costs and Relative
    Advantages       |     |     | 103 | 
|                                                |                                                        |                                      | Intermediates Segment                          |     |     | 103 | 
|                                                |                                                        |                                      | Development Projects
    Segment               |     |     | 104 | 
|                                                | 2002 Compared with 2001                                |                                      |                                                | 104 |    
|                                                |                                                        | Earnings Summary                     |                                                |     | 104 |    
|                                                |                                                        | Nickel Production                    |                                                |     | 104 |    
|                                                |                                                        | Copper Production                    |                                                |     | 104 |    
|                                                |                                                        | Net Sales                            |                                                |     | 105 |    
|                                                |                                                        | Costs and Expenses/ Other
    Income |                                                |     | 105 |    
|                                                |                                                        |                                      | Cost of Sales and Other
    Operating Expenses |     |     | 105 | 
|                                                |                                                        |                                      | Depreciation and
    Depletion                 |     |     | 105 | 
|                                                |                                                        |                                      | Selling, General and
    Administrative        |     |     | 105 | 
|                                                |                                                        |                                      | Currency Translation
    Adjustments           |     |     | 105 | 
|                                                |                                                        |                                      | Interest Expense                               |     |     | 105 | 
|                                                |                                                        |                                      | Asset Impairment Charges                       |     |     | 106 | 
|                                                |                                                        |                                      | Goro Project Suspension
    Costs              |     |     | 106 | 
|                                                |                                                        |                                      | Other Income, Net                              |     |     | 107 | 
|                                                |                                                        |                                      | Income and mining taxes                        |     |     | 107 | 
|                                                |                                                        |                                      | Minority Interest                              |     |     | 107 | 
|                                                |                                                        |                                      | Nickel Unit Cash Cost of
    Sales             |     |     | 107 | 
|                                                |                                                        |                                      | Allowance for doubtful
    accounts            |     |     | 107 | 
|                                                |                                                        |                                      | Energy Costs and Relative
    Advantages       |     |     | 107 | 
|                                                |                                                        |                                      | Intermediates Segment                          |     |     | 108 | 
|Cash Flows, Liquidity and
    Capital Resources |                                                        |                                      | 108                                            |    
|                                                | 2003 Compared with 2002                                |                                      |                                                | 108 |    
|                                                |                                                        | Operating Activities                 |                                                |     | 108 |    
|                                                |                                                        | Investing Activities                 |                                                |     | 109 |    
|                                                |                                                        | Financing Activities                 |                                                |     | 109 |    
|                                                | Contractual Obligations and
    Commercial Commitments |                                      |                                                | 112 |    
|                                                | 2002 Compared with 2001                                |                                      |                                                | 114 |    
|                                                |                                                        | Operating Activities                 |                                                |     | 114 |    
|                                                |                                                        | Investing Activities                 |                                                |     | 114 |    
|                                                |                                                        | Financing Activities                 |                                                |     | 114 |    
|Risks and Uncertainties                         |                                                        |                                      | 115                                            |    
|                                                | Market Risk                                            |                                      |                                                | 115 |    

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|                                                                    |                                                |                                                                                                                             |                                                                               |              |     |     |     | 
|------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------ | --- | --- | --- | 
|Item                                                                |                                                | Page                                                                                                                       
|                                                                    |                                                |                                                                                                                            
|                                                                    |                                                |                                                                                                                             | Metals and Commodities
    Risk                                               |              |     | 116 |    
|                                                                    |                                                |                                                                                                                             | Foreign Exchange Risk                                                         |              |     | 118 |    
|                                                                    |                                                |                                                                                                                             | Interest Rate Risk                                                            |              |     | 119 |    
|                                                                    |                                                |                                                                                                                             | Counterparty Risk                                                             |              |     | 120 |    
|                                                                    |                                                | Environmental Risk                                                                                                          |                                                                               |              | 120 |    
|                                                                    |                                                | Other Risks and
    Uncertainties                                                                                           |                                                                               |              | 123 |    
|                                                                    |                                                |                                                                                                                             | PT Inco                                                                       |              |     | 123 |    
|                                                                    |                                                |                                                                                                                             | Risks Associated with, and
    Importance of, Future Low-Cost Nickel Projects |              |     | 123 |    
|                                                                    |                                                |                                                                                                                             | Uncertainty of Production
    and Capital and Other Cost Estimates            |              |     | 124 |    
|                                                                    |                                                |                                                                                                                             |                                                                               | Goro         |     |     | 125 | 
|                                                                    |                                                |                                                                                                                             |                                                                               | Operations   |     |     | 126 | 
|                                                                    |                                                |                                                                                                                             |                                                                               | Voiseys Bay |     |     | 126 | 
|                                                                    |                                                |                                                                                                                             | Construction Risks and
    Technological Risks                                |              |     | 127 |    
|                                                                    |                                                |                                                                                                                             | Governmental Regulations                                                      |              |     | 127 |    
|                                                                    |                                                |                                                                                                                             | Capital Requirements and
    Operating Risks                                  |              |     | 128 |    
|                                                                    |                                                |                                                                                                                             | Labour Relations                                                              |              |     | 128 |    
|                                                                    |                                                |                                                                                                                             | Uncertainty of Ore Reserve
    Estimates                                      |              |     | 129 |    
|                                                                    | Sensitivities                                  |                                                                                                                             |                                                                               | 130          |    
|                                                                    |                                                | Derivative Instrument
    Positions                                                                                         |                                                                               |              | 132 |    
|                                                                    |                                                | Off-Balance Sheet Financing
    Arrangements                                                                                |                                                                               |              | 134 |    
|                                                                    | Critical Accounting Policies
    and Estimates |                                                                                                                             |                                                                               | 134          |    
|                                                                    |                                                | Inventories                                                                                                                 |                                                                               |              | 135 |    
|                                                                    |                                                | Property, Plant and
    Equipment                                                                                           |                                                                               |              | 135 |    
|                                                                    |                                                |                                                                                                                             | Exploration Properties                                                        |              |     | 136 |    
|                                                                    |                                                | Depreciation and
    depletion                                                                                              |                                                                               |              | 136 |    
|                                                                    |                                                | Impairment                                                                                                                  |                                                                               |              | 138 |    
|                                                                    |                                                | Asset Retirement
    Obligations                                                                                            |                                                                               |              | 139 |    
|                                                                    |                                                | Future Employee Benefits and
    Costs                                                                                      |                                                                               |              | 140 |    
|                                                                    |                                                | Income and mining taxes                                                                                                     |                                                                               |              | 141 |    
|                                                                    | Accounting Changes                             |                                                                                                                             |                                                                               | 142          |    
|                                                                    |                                                | 2001                                                                                                                        |                                                                               |              | 142 |    
|                                                                    |                                                | 2002                                                                                                                        |                                                                               |              | 142 |    
|                                                                    |                                                | 2003                                                                                                                        |                                                                               |              | 143 |    
|                                                                    |                                                | 2004                                                                                                                        |                                                                               |              | 143 |    
|                                                                    | Outlook                                        |                                                                                                                             |                                                                               | 143          |    
|                                                                    |                                                | Operations                                                                                                                  |                                                                               |              | 143 |    
|                                                                    |                                                | 2004 Planned Capital
    Expenditures and Production                                                                        |                                                                               |              | 144 |    
|                                                                    |                                                | Nickel Market Conditions                                                                                                    |                                                                               |              | 145 |    
|                                                                    | Non-GAAP Financial
    Measure                 |                                                                                                                             |                                                                               | 145          |    
|                                                                    |                                                | Reconciliation of Nickel
    Unit Cash Cost of Sales Before and After By-Product Credits to
    Canadian GAAP Cost of Sales |                                                                               |              | 146 |    
|                                                                    | Other Information                              |                                                                                                                             |                                                                               | 146          |    
|7A.  Quantitative
    and Qualitative Disclosures About Market Risk |                                                |                                                                                                                             | 146                                                                           |             
|8.  Financial
    Statements and Supplementary Data                 |                                                |                                                                                                                             | 147                                                                           |             

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|                                                                                                 |                                                                    |      |     |     | 
|------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------ | ---- | --- | --- | 
|Item                                                                                             |                                                                    | Page
|                                                                                                 |                                                                    |     
|9.  Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure |                                                                    |      | 197 |    
|9A.  Controls and
    Procedures                                                                 |                                                                    |      | 197 |    
|                                                                                                 | Disclosure Controls and
    Procedures                             |      |     | 197 | 
|                                                                                                 | Internal Control Over
    Financial Reporting                      |      |     | 197 | 
|                                                                                                
|PART III                                                                                        
|10.  Directors and
    Executive Officers of Inco Limited                                        |                                                                    |      | 198 |    
|11.  Executive
    Compensation                                                                  |                                                                    |      | 198 |    
|12.  Security
    Ownership of Certain Beneficial Owners and Management                          |                                                                    |      | 198 |    
|                                                                                                 | Security Ownership of
    Certain Beneficial Owners and Management |      |     | 198 | 
|                                                                                                 | Changes in Control                                                 |      |     | 198 | 
|13.  Certain
    Relationships and Related Transactions                                          |                                                                    |      | 198 |    
|14.  Principal
    Accountant Fees and Services                                                  |                                                                    |      | 198 |    
|                                                                                                
|PART IV                                                                                         
|15.  Exhibits,
    Financial Statement Schedules, and Reports on Form 8-K                        |                                                                    |      | 199 |    
|Signatures                                                                                       |                                                                    |      | 201 |    
|Consent of Independent
    Accountants                                                           |                                                                    |      | 203 |    



vi



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##### Table of Contents






PART I






|                |                                            
|--------------- | -------------------------------------------
|Items 1. and 2. | Business and Properties of Inco
    Limited



Introduction

Inco Limited (Inco, the
Company, we or us) was
incorporated in 1916 under the laws of Canada, succeeding a
business established in 1902. In 1979, the Company was continued
by articles of continuance under the Canada Business
Corporations Actand is governed by that Act. The
Companys executive offices are located at 145 King Street
West, Suite 1500, Toronto, Ontario, Canada M5H 4B7. Unless
the context otherwise requires, all references in this Report to
Inco or the Company include all of its
consolidated subsidiaries, unincorporated units and divisions.

Inco is one of the worlds premier mining
and metals companies. The Company is a leading producer of
nickel, a hard, malleable metal which, given its properties and
wide range of applications, can be found in thousands of
products. The Company is also an important producer of copper,
precious metals and cobalt and produces sulphuric acid and
liquid sulphur dioxide as by-products from its processing
operations at Sudbury, Ontario. The Companys principal
mines and processing operations are located in the Sudbury area
of Ontario, the Thompson area of Manitoba and, through a
subsidiary in which the Company has an equity interest of
61 per cent, PT International Nickel Indonesia Tbk
(PT Inco), on the island of Sulawesi, Indonesia
(reference is made to PT International Nickel Indonesia
Tbk below). The Company has additional wholly-owned metals
refineries at Port Colborne, Ontario and in the United Kingdom
at Clydach, Wales and Acton, England. The Company also has
interests in nickel refining capacity in the following Asian
countries: in Japan, through contractual arrangements with Inco
TNC Limited (ITL), in which the Company has an
equity interest of 67 per cent; in Taiwan, through Taiwan
Nickel Refining Corporation (Taiwan Nickel), in
which the Company has an equity interest of 49.9 per cent;
and in South Korea, through Korea Nickel Corporation
(Korea Nickel), in which the Company has an equity
interest of 25 per cent. In the Peoples Republic of
China (China), the Company has a 65 per cent
equity interest in Jinco Nonferrous Metals Co., Ltd.
(Jinco), a company which produces nickel salts for
plating and other applications at a plant near Shanghai. In
August 2003 the Company announced that it would be forming Inco
Wanzhong Advanced Technology Materials (Dalian) Ltd. (Inco
Wanzhong), a new joint venture company in which Inco would
have approximately a 62 per cent equity interest. Inco
Wanzhong is being established to produce high quality nickel
foam for sale to the manufacturers of nickel rechargeable
batteries in the Asian market. We have been evaluating other
commercial relationships in China, and in early March 2004
started up a shearing and packaging operation for certain nickel
products to service the specific needs of this market.

Inco is currently developing or plans to develop
two major new or greenfield projects, its
wholly-owned Voiseys Bay nickel-copper-cobalt project in
the Province of Newfoundland and Labrador and its approximately
85 per cent-owned Goro nickel-cobalt project in the French
overseas territorial community (collectivité
territoriale) of New Caledonia (New Caledonia).

Inco owns approximately an 85 per cent
equity interest in Goro Nickel S.A. (Goro Nickel),
the project company which holds a number of concessions covering
nickel-cobalt properties in New Caledonia. In April 2001, the
Company announced that it planned to proceed with the
construction of a commercial nickel-cobalt project in the south
province of New Caledonia to supply nickel products to stainless
steel customers in South Korea, Taiwan and eventually China and
cobalt products to certain markets. This project encompassed a
fully integrated mining and processing facility with a planned
annual production capacity of approximately 55,000 tonnes of
nickel and 4,500 tonnes of cobalt. In September 2002, the
Company initiated a review process covering a number of key
aspects of the Goro project, including the projects
capital cost estimate and construction schedule, and in December
2002 it suspended construction and initiated a significantly
more comprehensive review of the project following the receipt
of information from the engineering firms that had been
providing engineering, procurement and construction management
services to the project which indicated an unacceptable increase
in the capital cost estimate for the project of 30 to
45 per cent above the projects then current capital
cost estimate of $1,450 million. This review evolved into
two phases during 2003. The first phase of this review focused
on an orderly suspension of work and identification of
opportunities for capital cost reduction. On

1



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##### Table of Contents



August 13, 2003, the Company announced the
key results of the first phase of the review process and that it
was moving to the second phase of the review process which would
involve a structured process to further develop the capital cost
reduction opportunities identified in the first phase and
establish a capital cost control estimate, an updated project
schedule and an optimized and clearly defined scope and
execution plan for the project. The Company currently plans to
report on the status of the second phase in August 2004 and to
reach a decision on whether or not to proceed, and if the
decision is to proceed, the terms and conditions on how, we
would proceed with this project. As a result of the actions
taken by December 31, 2002, the Company recorded a pre-tax
charge of $25 million in the fourth quarter of 2002
relating to the Goro project. This charge included
$62 million (i) relating to the cancellation or
termination of certain outstanding contractual obligations,
(ii) to accrue for certain demobilization costs and
(iii) to reduce the carrying value of certain assets
relating to the project. This charge was partially offset by
currency hedging gains of $37 million on certain forward
currency contracts which became ineffective for hedge accounting
purposes because of the suspension of this project. For further
information on this review and other aspects of the Goro
project, see Goro Nickel S.A. below.


Inco holds a 100 per cent equity interest in
the Voiseys Bay nickel-copper-cobalt deposits in Labrador
in the Province of Newfoundland and Labrador through its
wholly-owned subsidiary, Voiseys Bay Nickel Company
Limited (VBNC). In 2002 the Company reached
agreements with the other key stakeholders in the project, the
Province of Newfoundland and Labrador, the Labrador Inuit
Association (LIA) and Innu Nation, to enable the
commercial development of the Voiseys Bay deposits to
proceed. The Company made significant progress on the initial or
phase 1 of the Voiseys Bay project in 2003. In 2003, the
Company spent approximately $138 million on the initial
phase of this project, which phase consists of an open pit mine,
concentrator and related facilities and a research and
development program on hydrometallurgical processing
technologies and certain other programs, and currently expects
to spend approximately $430 million on this initial phase
in 2004. Approximately 70 per cent of the project
engineering and 75 per cent of the procurement for the open
pit mine and the concentrator and related facilities had been
completed by early March 2004. During 2003, an airstrip and
construction camp, and nearly one-third of the concentrator
construction were completed, and work began on the
projects port facility. During 2003, the Company, as part
of the hydrometallurgical process research and development
program, continued testing pressure oxidative leaching processes
for Voiseys Bay at its mini-pilot plant in Mississauga,
Ontario which began operation in the second quarter of 2003. As
a result of a review of the net carrying value of the
Voiseys Bay project which was announced in June 2002, the
Company recorded a non-cash charge of $1,552 million, net
of deferred income and mining taxes of $770 million, in the
second quarter of 2002, to reduce the $3,753 million net
carrying value of the Voiseys Bay project to
$2,201 million. For further information on the
Voiseys Bay project and related matters, see
Voiseys Bay Nickel Company Limited below.

Incos properties are described under
Description of Business and Ore Reserves and
Mining Rights below.

The information in this Report is as of
December 31, 2003 except where an earlier or later date is
expressly indicated. Nothing included herein should be
considered as implying that any information is correct as of any
date other than December 31, 2003, except as otherwise
expressly stated.

In this report, certain data and estimates which
had been previously limited to the Western World or the Western
World plus China because of limited available data from certain
countries or regions has been reported on a global or worldwide
basis for 2003.




Availability of Documents

Inco files Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K with the Securities and Exchange Commission. You
may read and copy any materials we file with the Securities and
Exchange Commission at the Commissions Public Reference
Room at 450 Fifth Street, NW, Washington, DC 20549.
You may obtain information on the hours of operation of the
Securities and Exchange Commissions Public Reference Room
by calling the Commission at 1-800-SEC-0330. The Securities and
Exchange Commission maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the Commission. Such reports and
all amendments to such reports regarding the Company are
available free of charge on the Companys

2



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##### Table of Contents



website, www.inco.com, as soon as
reasonably practicable after such reports are electronically
filed with the Securities and Exchange Commission. Information
contained in or otherwise accessed through the Companys
website does not form part of this Report. All such references
to the Companys website are inactive textual references
only.





Cautionary Statement Regarding Forward-Looking
Statements

Certain statements contained in this Report are
forward-looking statements (as defined in the
U.S. Securities Exchange Act of 1934, as amended). Examples
of such statements include, but are not limited to, statements
concerning: (1) the price volatility for nickel and other
primary metal products produced by the Company; (2) the
long-term demand for and supply of nickel, copper and other
metals as well as the availability of, and prices for,
intermediates containing nickel purchased by the Company, and
nickel-containing stainless steel scrap and other substitutes
for primary nickel; (3) the premiums realized by the
Company over London Metal Exchange (LME) cash prices
and the sensitivity of the Companys results of operations
to changes in metals prices, prices of commodities used in its
operations and interest and exchange rates; (4) the
Companys strategies and plans; (5) the Companys
interest and other expenses; (6) the Companys energy
and other costs, and pension contributions and expenses and
assumptions relating thereto; (7) the Companys
position as a low-cost producer of nickel; (8) the
Companys debt-equity ratio and tangible net worth;
(9) the political unrest or instability in countries such
as Indonesia and its impact on the Companys Indonesian
subsidiary, PT Inco, and political developments in other
countries in which the Company operates and elsewhere;
(10) the completion and results of a comprehensive review
of the capital cost, scope, schedule and other key aspects of
the Goro project; (11) the timing of reaching a decision on
whether to proceed with, and the necessary financing plans and
arrangements for, and partner or similar investment and other
agreements or arrangements associated with, the Goro project,
and the timing of the start of production and the costs of
construction with respect to, the issuance of the necessary
permits and other authorizations required for, and engineering
and construction timetables for, the Goro and Voiseys Bay
projects; (12) the Companys estimates of the quantity
and quality of its ore reserves; (13) planned capital
expenditures; (14) the Companys costs of production
and production levels, including the costs and potential impact
of complying with existing and proposed environmental laws and
regulations and net reductions in environmental emissions;
(15) the impact of changes in Canadian
dollar-U.S. dollar and other exchange rates on the
Companys costs and the results of its operations;
(16) the Companys sales of specialty nickel products;
(17) the Companys cost reduction and other financial
and operating objectives and planned maintenance shutdowns;
(18) the commercial viability of new production processes
and process changes and processing recoveries for its
development projects; (19) the Companys productivity,
exploration and research and development initiatives as well as
environmental, health and safety initiatives; (20) the
negotiation of collective agreements with its unionized
employees; (21) the Companys sales organization and
personnel requirements; (22) business and economic
conditions; and (23) the enforceability of certain
liabilities. Inherent in forward-looking statements are risks
and uncertainties well beyond the Companys ability to
predict or control. Actual results and developments are likely
to differ, and may differ materially, from those expressed or
implied by the forward-looking statements contained in this
Report. Such statements are based on a number of assumptions
which may prove to be incorrect, including, but not limited to,
assumptions about: (a) business and economic conditions,
including exchange rates and energy, and other anticipated and
unanticipated costs and pension contributions and expenses;
(b) the supply and demand for, deliveries of, and the level
and volatility of prices of, nickel, copper, cobalt and the
Companys other primary metals products, purchased
intermediates and nickel-containing stainless steel scrap and
other substitutes and competing products for the primary nickel
and ot her metal products the Company produces; (c) the
timing of the receipt of regulatory and governmental approvals
for the Goro and Voiseys Bay projects and other
operations; (d) the availability of financing, including
through partner or other participation arrangements in the case
of the Goro project, for the Companys development projects
on reasonable terms; (e) the Companys costs of
production and production and productivity levels, as well as
those of the Companys competitors; (f) engineering
and construction timetables and capital and operating costs for
the Goro and Voiseys Bay projects; (g) market
competition; (h) mining, processing, exploration and
research and development activities; (i) the accuracy of
ore reserve estimates; (j) premiums realized over LME cash
and other benchmark prices; (k) tax benefits; (l) the
resolution of environmental and other proceedings and the impact
on the Company of various environmental regulations and
initiatives;

3



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##### Table of Contents



(m) political instability in Indonesia and
other countries or locations in which the Company operates or
otherwise; and (n) the Companys ongoing relations
with its employees at its operations throughout the world. The
forward-looking statements included in this Report represent the
Companys views as of the date of this Report. While the
Company anticipates that subsequent events and developments may
cause the Companys views to change, the Company
specifically disclaims any obligation to update these
forward-looking statements. These forward-looking statements
should not be relied upon as representing the Companys
views as of any date subsequent to the date of this Report.





Description of Business



Sales

The following table shows the Companys net
sales to customers for the three years ended December 31,
2003:

|                   |                        |               |       |       |  |      |       |       |  |   |       |       | 
|------------------ | ---------------------- | ------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                   |                        | 2003          |       | 2002  |  | 2001
|                   |                        |               |       |       |  |     
|                   |                        |              
|                   |                        | (in millions)
|Primary nickel     |                        | $             | 2,109 |       |  | $    | 1,654 |       |  | $ | 1,488 |      
|Copper             |                        |               | 171   |       |  |      | 184   |       |  |   | 195   |      
|Precious metals(1) |                        |               | 114   |       |  |      | 238   |       |  |   | 292   |      
|Cobalt             |                        |               | 17    |       |  |      | 24    |       |  |   | 34    |      
|Other(2)           |                        |               | 63    |       |  |      | 61    |       |  |   | 57    |      
|                   |                        |               |       |       |  |      |       |       |  |   |       |      
|                   | Net sales to customers |               | $     | 2,474 |  |      | $     | 2,161 |  |   | $     | 2,066 | 
|                   |                        |               |       |       |  |      |       |       |  |   |       |      



---



|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes toll-refined materials.                                                                                                                        
|(2) | Representing principally sales of sulphuric acid,
    liquid sulphur dioxide, miscellaneous primary metals products
    and reprocessed waste materials.




Deliveries

The following table shows deliveries of the
Companys principal primary metals and related products for
the three years ended December 31, 2003:

|                                                   |  |      |         |      |  |      |         |  |  |  |         | 
|-------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                                                   |  | 2003 |         | 2002 |  | 2001
|                                                   |  |      |         |      |  |     
|Nickel, including intermediates(1)(tonnes)(2)      |  |      | 213,890 |      |  |      | 231,590 |  |  |  | 230,049 | 
|Copper(3)(tonnes)                                  |  |      | 93,335  |      |  |      | 113,116 |  |  |  | 116,751 | 
|Cobalt (tonnes)                                    |  |      | 903     |      |  |      | 1,582   |  |  |  | 1,454   | 
|Platinum(4)(troy ounces, in thousands)             |  |      | 83      |      |  |      | 189     |  |  |  | 177     | 
|Palladium(4)(troy ounces, in
    thousands)        |  |      | 101     |      |  |      | 225     |  |  |  | 206     | 
|Rhodium(4)(troy ounces, in thousands)              |  |      | 17      |      |  |      | 13      |  |  |  | 13      | 
|Ruthenium(4)(troy ounces, in
    thousands)        |  |      | 2       |      |  |      | 1       |  |  |  | 4       | 
|Iridium(4)(troy ounces, in thousands)              |  |      | 6       |      |  |      | 3       |  |  |  | 5       | 
|Gold(4)(troy ounces, in thousands)                 |  |      | 50      |      |  |      | 71      |  |  |  | 76      | 
|Silver(4)(troy ounces, in thousands)               |  |      | 1,435   |      |  |      | 1,570   |  |  |  | 1,540   | 
|Sulphuric acid and liquid sulphur dioxide (tonnes) |  |      | 548,000 |      |  |      | 732,000 |  |  |  | 696,000 | 



---



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | Includes 29,780 tonnes in 2003, 19,343 tonnes in
    2002 and 22,978 tonnes in 2001 purchased by the Company.
|(2) | A tonne is a metric unit equal to approximately
    2,204.6 pounds.                                          
|(3) | Includes 1,133 tonnes in 2003 and 3,097 tonnes in
    2002 purchased by the Company.                         
|(4) | Excludes toll-refined materials.                                                                             

4



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##### Table of Contents






Prices






| |       
| | ------
| | Nickel

Incos nickel price realizations tend to lag
LME cash nickel price movements due primarily to the terms of
the Companys contractual sales arrangements with certain
of its customers. The LME, a physical market where various
metals, including nickel, can be bought or sold for prompt or
future delivery, represents the principal terminal market in the
world for nickel meeting certain specifications. The Company
realizes a premium over prevailing LME cash prices for its
nickel powders and other value-added products, as discussed
under Inco Special Products below.

The Companys average realized price for its
primary nickel products, including intermediates and purchased
products, was $9,860 per tonne ($4.47 per pound) in
2003, representing an increase of 38 per cent from the
average price of $7,143 per tonne ($3.24 per pound)
realized in 2002. The 2002 average price was 10 per cent
higher than the average price of $6,468 per tonne
($2.93 per pound) realized in 2001.

The Companys price realizations for its
nickel and other primary metals products generally reflect LME
or other metal market prices and, over the longer term, depend
principally upon the balance between demand for its products in
the marketplace relative to the supply available from the
Company and its competitors, including for this purpose similar
primary metals materials in various producer, merchant and
consumer inventories, inventories of secondary or scrap
materials containing nickel and other metals in usable or
recyclable form, and supplies of other materials which may
compete as substitutes. Of particular importance is the
availability of nickel-containing stainless steel scrap, which
competes directly with primary nickel as a source of nickel for
use in the production of stainless steel. The scrap ratio, or
that portion of total nickel units consumed in the form of
nickel-containing stainless steel scrap by stainless steel
producers in the world, was 44 per cent in 2003, compared
with 45 per cent in 2002 and 47 per cent in 2001. The
applications for nickel and variations in demand for and supply
of nickel are discussed under Nickel below.

For information on the Companys hedging
transactions relating to nickel, see Item 7A of this Report
and Notes 1, 20 and 23(h) to the financial statements under
Item 8 of this Report.

The average prices, per tonne and per pound,
realized by Inco for its primary nickel products, including
intermediates and purchased products, for the five years ended
December 31, 2003, are shown in the following table:

|               |  |               |        |               |  |  |      | 
|-------------- |  | ------------- | ------ | ------------- |  |  | ---- | 
|               |  |              
|Year           |  | Nickel       
|               |  |              
|               |  |               |        |              
|               |  | ($ per tonne) |        | ($ per pound)
|1999           |  |               | 6,415  |               |  |  | 2.91 | 
|2000           |  |               | 9,007  |               |  |  | 4.09 | 
|2001           |  |               | 6,468  |               |  |  | 2.93 | 
|2002           |  |               | 7,143  |               |  |  | 3.24 | 
|              
|2003           |  |               |        |               |  |  |      | 
|First Quarter  |  |               | 8,582  |               |  |  | 3.89 | 
|Second Quarter |  |               | 8,652  |               |  |  | 3.92 | 
|Third Quarter  |  |               | 9,614  |               |  |  | 4.36 | 
|Fourth Quarter |  |               | 12,403 |               |  |  | 5.63 | 
|Year           |  |               | 9,860  |               |  |  | 4.47 | 






| |       
| | ------
| | Copper

The Companys average realized price for
copper was $1,832 per tonne ($0.83 per pound) in 2003,
representing an increase of 12 per cent from the average
price of $1,629 per tonne ($0.74 per pound) realized
in 2002. The 2002 average realized price was two per cent lower
than the average price of $1,668 per tonne ($0.76 per
pound) realized in 2001.

5



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##### Table of Contents



The average prices, per tonne and per pound,
realized by the Company for copper, including purchased
products, for the five years ended December 31, 2003, are
shown in the following table:

|               |  |               |       |               |  |  |      | 
|-------------- |  | ------------- | ----- | ------------- |  |  | ---- | 
|               |  |              
|Year           |  | Copper       
|               |  |              
|               |  | ($ per tonne) |       | ($ per pound)
|1999           |  |               | 1,631 |               |  |  | 0.74 | 
|2000           |  |               | 1,908 |               |  |  | 0.87 | 
|2001           |  |               | 1,668 |               |  |  | 0.76 | 
|2002           |  |               | 1,629 |               |  |  | 0.74 | 
|              
|2003           |  |               |       |               |  |  |      | 
|First Quarter  |  |               | 1,714 |               |  |  | 0.78 | 
|Second Quarter |  |               | 1,641 |               |  |  | 0.74 | 
|Third Quarter  |  |               | 1,329 |               |  |  | 0.60 | 
|Fourth Quarter |  |               | 2,087 |               |  |  | 0.95 | 
|Year           |  |               | 1,832 |               |  |  | 0.83 | 






| |             
| | ------------
| | Other Metals

The average prices, per tonne or per troy ounce,
realized by the Company for cobalt, the principal platinum-group
metals (platinum, palladium and rhodium), gold and silver, all
of which are produced primarily from the Companys Ontario
ores, for the five years ended December 31, 2003, are shown
in the following table:

|     |  |               |        |                    |  |           |        |         |  |      |        |        |  |  |          |  |  |  |        |  |  |  |      | 
|---- |  | ------------- | ------ | ------------------ |  | --------- | ------ | ------- |  | ---- | ------ | ------ |  |  | -------- |  |  |  | ------ |  |  |  | ---- | 
|Year |  | Cobalt        |        | Platinum           |  | Palladium |        | Rhodium |  | Gold |        | Silver
|     |  |               |        |                    |  |           |        |         |  |      |        |       
|     |  |               |        |                   
|     |  | ($ per tonne) |        | ($ per troy ounce)
|1999 |  |               | 30,556 |                    |  |           | 377.59 |         |  |      | 359.80 |        |  |  | 888.33   |  |  |  | 280.69 |  |  |  | 5.29 | 
|2000 |  |               | 29,475 |                    |  |           | 541.55 |         |  |      | 670.04 |        |  |  | 1,930.63 |  |  |  | 278.91 |  |  |  | 4.99 | 
|2001 |  |               | 23,216 |                    |  |           | 541.27 |         |  |      | 711.32 |        |  |  | 1,475.85 |  |  |  | 270.50 |  |  |  | 4.40 | 
|2002 |  |               | 15,124 |                    |  |           | 545.92 |         |  |      | 419.70 |        |  |  | 804.59   |  |  |  | 309.17 |  |  |  | 4.58 | 
|2003 |  |               | 18,846 |                    |  |           | 653.87 |         |  |      | 202.69 |        |  |  | 530.67   |  |  |  | 366.15 |  |  |  | 4.86 | 

For information on the Companys hedging
transactions relating to these metals, see Item 7A of this
Report and Notes 1, 20 and 23 to the financial statements
under Item 8 of this Report.




Operating
Results

The Companys operating results comprise
earnings or loss before income and mining taxes, interest
expense, other income or expenses, and minority interest. All
financial statement information in this Report is based on the
Companys financial statements prepared in accordance with
Canadian generally accepted accounting principles
(GAAP). A reconciliation of the Companys
financial statements to U.S. GAAP is presented in
Note 23 to the financial statements under Item 8 of
this Report.




Customers

As in recent years, sales of the Companys
primary metals products in 2003 were concentrated in the United
States, Europe, Japan, other countries in Asia, and Canada, with
sales of nickel to customers in Asia representing about
66 per cent of the Companys total nickel sales
revenues for 2003. For further information, see
Incos Position in the Nickel Industry below.

For 2003, the Company had no non-affiliated
customer which accounted for more than five per cent of
Incos total nickel deliveries. In 2002, Special Metals
Corporation (SMC), which purchased Incos
alloys business in 1998, was the only non-affiliated customer
whose purchases accounted for more than five per cent of
Incos total deliveries. Such purchases by SMC accounted
for approximately six per cent of Incos total nickel
deliveries for 2002, compared with approximately eight per
cent in 2001. As discussed under Managements

6



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##### Table of Contents



Discussion and Analysis of Financial Condition
and Results of Operations under
Item 7 of this Report, the Company recorded certain
non-cash asset impairment charges in 2002 associated with
certain receivables and other assets relating to this customer
given SMCs filing for bankruptcy protection in the
U.S. in late March 2002. See Nickel,
Copper and Other Primary Metals and Related
Products below for additional information on the
Companys customers.





Competitors

A discussion of the competitive conditions in the
nickel industry appears under Nickel below.
Competitive conditions with respect to the Companys other
primary metals and related products are discussed under
Copper and Other Primary Metals and Related
Products below.




Inventories

The Companys general practice is to sell
its principal primary metals products at the time of production
and not to hold inventories except as necessary to meet its
current sales requirements. Incos finished nickel
inventories at the end of each of the five years ended
December 31, 2003 are shown in the following table:

|         |  |                 |        | 
|-------- |  | --------------- | ------ | 
|         |  | Incos Finished
|Year-end |  | Nickel         
|         |  |                
|         |  | (in tonnes)    
|1999     |  |                 | 24,333 | 
|2000     |  |                 | 26,582 | 
|2001     |  |                 | 26,517 | 
|2002     |  |                 | 23,126 | 
|2003     |  |                 | 25,604 | 

In recent years the minimum finished nickel
inventories we generally need to run our business and meet
customers requirements have been about 26,000 tonnes,
depending upon the required product mix.




Nickel Unit
Cash Cost of Sales

Since this measure captures our key costs of
production and the impact of the prices for our by-products,
nickel unit cash cost of sales represents a key performance
measurement that management uses to manage our costs and
operations. Nickel unit cash cost of sales before by-product
credits, representing a calculation equal to the total of all
cash costs incurred to produce a unit of nickel before the
deduction of contributions from by-products sold divided by
Inco-source nickel deliveries, increased to $4,453 per
tonne ($2.02 per pound) in 2003 from $3,483 per tonne
($1.58 per pound) in 2002. Nickel unit cash cost of sales
after by-product credits increased to $4,740 per tonne ($2.15
per pound) in 2003 from $3,197 per tonne ($1.45 per pound) in
2002.

The increase in nickel unit cash cost of sales
both before and after by-product credits in 2003 was due to the
unfavourable effect of the strengthening of the Canadian dollar
relative to the U.S. dollar on our costs incurred in Canadian
dollars, higher energy costs at PT Inco and our Ontario
operations, higher employment and pension costs, higher costs
for purchasing and processing larger volumes of purchased
intermediates, the ramp-up problems experienced at our Ontario
operations after the three-month strike discussed below and, in
the case of nickel unit cash cost of sales after by-product
credits, lower contributions from by-products, primarily
resulting from lower deliveries of platinum-group metals due to
that strike.

A reconciliation of our nickel unit cash cost of
sales before and after by-product credits to cost of sales under
Canadian GAAP is shown in the table Reconciliation of
Nickel Unit Cash Cost of Sales Before and After By-Product
Credits to Canadian GAAP Cost of Sales in the
Companys Managements Discussion and Analysis of
Financial Conditions and Results of Operationsset forth as
Item 7 of this Report.

It is currently expected that at least some of
the principal factors which have caused increases in nickel unit
cash cost of sales before and after by-product credits for 2003
will continue to adversely affect such nickel unit cash costs of
sales into 2004. As a result of changes in certain assumptions
and actual experience of plan assets as

7



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##### Table of Contents



well as certain legislative and regulatory
requirements referred to under Cash Flows, Liquidity and
Capital Resources in the Companys
Managements Discussion and Analysis of Financial
Conditions and Results of Operations set forth as
Item 7 of this Report, we currently expect that pension
expense will increase slightly from the 2003 level of
$107 million to approximately $112 million in 2004
and, depending upon the future performance of our pension plan
assets and other related factors, including changes in certain
exchange rates, in particular the Canadian dollar, this expense
is currently expected to remain at least at that level until at
least 2005.


The Company experienced a three-month strike at
our Ontario operations which began June 1, 2003. Prior to
the strike, all of the Companys principal operations were
operating above planned production levels for 2003. When
operations resumed at the Ontario operations after the end of
the three-month strike in late August 2003, we experienced a
series of unanticipated problems principally at those
operations smelter and related facilities. These problems
were associated with the ramp-up of those facilities after the
strike and included outages or curtailments of operations at the
oxygen plants and acid plant. These problems resulted in lower
than planned production of in-process and finished material. Due
to these problems, an expense of $25 million was incurred
during the third quarter of 2003 based upon the resulting
production shortfall we experienced at those operations.

Operating costs continued to represent a major
challenge for us in 2003 due to a stronger Canadian dollar,
higher energy costs, increased pension expense, higher costs for
purchased intermediates and lower by-product credits. Many of
these cost pressures are expected to continue in 2004. We faced
three key production challenges in 2003 in addition to the
strike in Ontario and the ramp-up problems experienced when
production resumed after the strike in September 2003; lower ore
grades in Canada, in particular at the Companys Manitoba
operations; adverse smelter performance at our Manitoba
operations due to the processing of ores with higher magnesium
oxide content, and reaching or exceeding PT Incos
expanded production design capacity. Two of these challenges
were successfully met. At the Companys Manitoba
operations, we modified certain facilities to address the higher
magnesium oxide content of this operations Birchtree mine
ore, resulting in improved concentrate grade with no loss in
recoveries. At PT Inco, we produced a record 70,200 tonnes
(155 million pounds) of nickel-in-matte in 2003, exceeding
PT Incos production design capacity of 68,000 tonnes
(150 million pounds) despite completion of a planned
furnace rebuild in the first six weeks of the year. In 2003,
improved mining and blending practices raised the ore grades at
PT Inco as shown in the tables under Ore Reserves and
Mining Rights below. Furnace throughput at PT Inco
also improved based on these better ore blending practices and
higher grades. At PT Inco, we also increased power
available to improve throughput by enabling all five
hydroelectric generators to feed all furnaces. We were able to
resolve the ramp-up issues encountered at the Companys
Ontario operations following the three-month strike and
operations were on track in the fourth quarter of 2003.

The Companys nickel unit cash cost of
sales, both before and after by-product credits, for the five
years ended December 31, 2003, are shown in the following
table:

|     |  |                  |      |                  |  |  |      | 
|---- |  | ---------------- | ---- | ---------------- |  |  | ---- | 
|     |  | Nickel Unit Cash |      | Nickel Unit Cash
|     |  | Cost of Sales    |      | Cost of Sales   
|     |  | Before By-       |      | After By-       
|Year |  | Product Credits  |      | Product Credits 
|     |  |                  |      |                 
|     |  |                 
|     |  | ($ per pound)   
|1999 |  |                  | 1.29 |                  |  |  | 1.26 | 
|2000 |  |                  | 1.48 |                  |  |  | 1.23 | 
|2001 |  |                  | 1.56 |                  |  |  | 1.35 | 
|2002 |  |                  | 1.58 |                  |  |  | 1.45 | 
|2003 |  |                  | 2.02 |                  |  |  | 2.15 | 

Based upon the average exchange rate for the
year, the Canadian dollar, the currency in which a substantial
portion of the Companys operating costs are incurred,
increased by 12 per cent relative to the
U.S. dollar in 2003. In 2002, the Canadian dollar declined
by one per cent relative to the U.S. dollar. At
December 31, 2003, the value of the Canadian dollar,
relative to the U.S. dollar, was $0.774, compared with
$0.633 at December 31, 2002 and $0.628 at December 31,
2001, and was $0.748 at March 12, 2004. At
December 31, 2003, the Company had outstanding forward
currency contracts to purchase Cdn.$85 million in 2004 at
an average price of $0.717. These contracts are to hedge a
portion of the Companys Canadian production costs and the
construction costs for the

8



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##### Table of Contents



Voiseys Bay project and were the only
Canadian dollar currency hedges that the Company had outstanding
at December 31, 2003. For further information on these
contracts and contracts entered into after December 31,
2003 and a discussion of the sensitivity of foreign currency
exchange rates on the Companys earnings, see
Voiseys Bay Nickel Company Limited 
Project Phases below and Managements Discussion
and Analysis of Financial Condition and Results of
Operations under Item 7 of this Report.


For information regarding the Companys
profit sharing and incentive arrangements and the Companys
collective agreements with its unionized employees, see
Employees below.






| |                             
| | ----------------------------
| | Business Segment Information

Incos business operations consist of two
segments, its (i) finished products segment, representing
the Companys mining and processing operations in Ontario
and Manitoba, the refining operations in the United Kingdom and
its interests in refining operations in Japan and other Asian
countries referred to on page 1 of this Report, and
(ii) intermediates segment, which represents
PT Incos mining and processing operations in
Indonesia, where nickel-in-matte, an intermediate product, is
produced and sold primarily into the Japanese market. For
further information on the Companys business segments by
operating segment and geographic location, see Note 19 to
the financial statements under Item 8 of this Report.






| |       
| | ------
| | Nickel





| |                                
| | -------------------------------
| | Applications for
    Nickel (1)

Nickel is a hard, malleable metal with a wide
range of uses. Its principal characteristics include imparting
strength and corrosion resistance in alloys. The following five
general categories constitute the principal applications of
nickel: the production of nickel-bearing or austenitic stainless
steels, low-alloy steels, non-ferrous alloys, foundry industry
castings and non-alloying uses. The Companys nickel
products represent what is known in the industry as
primary nickel, a designation given to nickel
produced principally from nickel ores. It is estimated that
approximately 81 per cent of global primary nickel
consumption relates to its end use in austenitic stainless steel
production and as an alloy with other metals. The other type of
nickel used in industrial applications is known as
secondary nickel, which is also referred to as
recycled or scrap nickel. Secondary nickel units are recovered
largely from austenitic stainless steel manufacturing and
fabricating operations and nickel-containing scrap from obsolete
plant and equipment. In the recent past, secondary nickel has
represented between 43 and 48 per cent of the total
nickel used for austenitic stainless steels, with primary nickel
accounting for between 52 and 57 per cent of such
nickel use. These percentages can vary based upon relative
prices, the availability of scrap and other factors.

The nickel industry generally divides its primary
nickel products into three categories: charge nickel products
(products of various nickel purities produced in special forms
for the stainless and low-alloy steel industries), melting
nickel products (relatively pure metallic products for the
non-ferrous metals and foundry industries) and plating nickel
products (relatively pure metallic products in special shapes or
cut to special sizes for the plating industry).

The dominant use of primary nickel in the world
has continued to be in the production of nickel-bearing or
austenitic stainless steels. Stainless steels, defined as
iron-based alloys containing 10.5 per cent or more
chromium, are typically identified by their metallurgical
structure  austenitic, ferritic, martensitic,
precipitation-hardening and duplex. Approximately 75 to
77 per cent of global stainless steel production in
recent years consists of austenitic, or nickel-bearing, grades.
On average, austenitic stainless steels contain approximately
eight to 10 per cent nickel. Nickel-bearing stainless
steels are used throughout the industrialized world in a wide
variety of applications ranging from consumer products to
industrial process equipment, as well as for power generation
and transportation equipment, kitchen appliances and hundreds of
other applications where strength



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unless otherwise indicated, data in this Report
    on applications for nickel are on a global basis. Previous
    reports from the Company included data on a
    Western-World-plus-China basis. Western World is
    defined as the world excluding the former East Bloc countries
    (Russia and other members of the former Commonwealth of
    Independent States, China, Cuba, Bulgaria, the Czech Republic,
    Slovakia, Hungary, 
     Poland and Romania).

9



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##### Table of Contents



and corrosion resistance are required. Nickel use
in nickel-bearing or austenitic stainless steels currently
accounts for about 65 per cent of annual global
primary nickel consumption.


A second, closely related, use of primary nickel
is in low-alloy steels for construction and in structural, tool,
high-strength and electrical steels. These steels are produced
in greater volume than stainless steels but with a much lower
nickel content, averaging less than one per cent nickel by
weight. They account for about five per cent of annual global
primary nickel demand.

The third category of nickel use is in
non-ferrous alloys which, unlike the two categories of steel
alloys noted above, contain little or no iron. These alloys,
which are used in industrial process plants, marine engineering,
coinage, electronics, and gas turbine engine components, as well
as in other diverse products, account for approximately eight
per cent of annual global primary nickel demand.

A fourth category is comprised of foundry
industry castings, which consist of either iron alloys, steel
alloys or non-ferrous alloys. These uses account for about three
per cent of annual global primary nickel demand and represent
the balance of the approximately 81 per cent of
primary nickel used to make stainless steels and
nickel-containing alloys.

The fifth category consists of various
non-alloying uses of primary nickel. These uses account for the
remaining 19 per cent of annual global primary nickel
demand, and include electroplating (representing about seven per
cent of primary nickel demand) and numerous applications of
nickel powders, including Incos specialty nickel powder
products described under Inco Special Products
below. Many consumer durable goods, such as metal furniture, are
nickel-chrome electroplated. Nickel powder applications are a
relatively small but important nickel-consuming sector. Given
the properties of nickel powders, applications include
dissolving nickel into salts for plating and catalysts for the
petrochemical industry, and use in nickel-cadmium and
nickel-hydride rechargeable batteries, welding electrodes, metal
sprays and specialized parts made by powder metallurgy.

As indicated above, nickel used in stainless and
low-alloy steel sectors account for approximately
70 per cent of annual global primary nickel demand. In
choosing primary nickel, these two sectors can generally use
either charge nickel products or melting nickel products to
satisfy their nickel requirements; however, they may also use
secondary nickel units such as nickel-containing stainless steel
scrap or other recycled nickel-containing material, with the
selection being based largely on relative prices and
availability of these materials. See Prices 
Nickel above for a discussion of the percentages of nickel
consumed as stainless steel scrap by stainless steel producers.

Inco has been a member of the Nickel Development
Institute (NiDI), a non-profit association which
promotes applications for nickel, since NiDI was founded in
1984. NiDI sponsors numerous research and development projects,
including projects aimed at promoting the use of
nickel-containing stainless steels, broadening markets for
nickel-containing alloys resistant to high and low temperatures,
high pressures and corrosion, and seeking to ensure that sound
science is used as the basis for regulatory developments
relating to the production and use of nickel and
nickel-containing products and the recycling or disposal of
nickel-containing waste materials. In early 2004, NiDI and the
Nickel Producers Environmental Research Association
(NiPERA), an organization that we and other nickel
producers had formed in the 1980s to fund scientific studies
relating to, and focus on, environmental, health and other
issues with respect to various forms of nickel, merged to form
the Nickel Institute.






| |                                                                            
| | ---------------------------------------------------------------------------
| | Historical Review of the Nickel Industry;
    Recent Industry Conditions(2)

The nickel market has been cyclical in nature
over the past half-century given the positive correlation of
nickel demand to industrial production.

Primary nickel demand in the Western World grew
significantly during the 1946-1974 period in response to postwar
reconstruction, increased per capita incomes and the rapid
growth of the stainless steel industry. Annual



---

|    |                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Data and estimates included in this historical
    review through 2002 are limited to the Western World because of
    limited available data for certain countries. See Note 1
    above with respect to 
     our definition of Western World.

10



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##### Table of Contents



demand increased from approximately
136,100 tonnes in 1950 to a then record level of
approximately 620,000 tonnes in 1974. The compound rate of
annual growth in nickel demand over the 1946-1974 period was
about six per cent.


With the oil crisis in 1973, the substantial rise
in energy costs resulted in a reduction in industrial production
and a consequent reduction in primary nickel demand. These
negative trends were repeated in the early 1980s following a
second round of significant oil price increases in 1979-1980,
but were reversed in the second half of the 1980s, when a period
of strong industrial growth resulted in an increase in the
demand for nickel.

Record growth in stainless steel production,
accompanied by a shortage of nickel production, placed
significant upward pressure on LME cash nickel prices in 1988
and 1989, with these prices averaging $13,823 per tonne ($6.27
per pound) and $13,338 per tonne ($6.05 per pound),
respectively, for 1988 and 1989.

During the early 1990s, significant increases in
primary and secondary nickel deliveries to the world from the
Russian Federation (Russia) and other members of the
former Commonwealth of Independent States (CIS),
combined with economic downturns in North America, Western
Europe and Japan, led to a surplus in primary nickel supply,
resulting in a weakening of nickel prices. This situation was
exacerbated in 1992 and 1993 by negative economic growth in
Western Europe and Japan and continued exports of nickel from
the CIS. From 1990 to 1993, annual average LME cash nickel
prices fell from $8,885 per tonne ($4.03 per pound) to $5,291
per tonne ($2.40 per pound).

In 1994 and 1995, a worldwide economic recovery
led to strong growth in stainless steel production and nickel
demand, resulting in primary nickel demand exceeding supply and
a recovery in nickel prices, with the LME cash nickel price
rising to an average of $8,231 per tonne ($3.73 per pound) for
1995.

In the latter half of the 1990s, strong economic
growth led to significant increases in stainless steel
production and nickel demand, except that the Asian economic
crisis in 1998 caused overall nickel demand to decrease slightly
that year. The decrease in the demand for nickel during 1998,
combined with the markets anticipation of large supplies
of low-cost nickel from the three new Australian laterite
projects, Murrin Murrin, Bulong and Cawse, resulted in the LME
cash nickel price reaching a low for the decade of $3,725 per
tonne ($1.69 per pound) in December 1998. Nickel prices
recovered during 1999, supported by the resumption of strong
economic and nickel demand growth, with the LME cash nickel
price reaching $8,450 per tonne ($3.83 per pound) at the end of
1999.

The LME cash nickel price continued to increase
into 2000, reaching a peak of $10,660 per tonne ($4.84 per
pound) in March 2000 but, subject to some variability, over the
balance of 2000 declined to $7,190 per tonne ($3.26 per pound)
by the end of the year. Solid market conditions contributed to
the increase in the average LME cash nickel price to $8,642 per
tonne ($3.92 per pound) in 2000, as did the anticipation of
possible labour disruptions at certain producers which did not
materialize. The world economic recovery that commenced in 1999
continued in 2000, resulting in increased demand for
nickel-containing products, especially stainless steel where
world production of this material on a world basis increased in
2000 by 8.8 per cent to a record level of
19.5 million tonnes. However, the use of primary nickel in
this segment registered no growth in 2000 due to the increased
supply of nickel-containing stainless steel scrap, which led to
an increase in the scrap ratio to 48 per cent in 2000
from 44 per cent in 1999. Overall world demand for
primary nickel grew by 5.8 per cent in 2000 to a
record level of 1,109,000 tonnes, reflecting both stock
building by consumers, who were replenishing their inventories
from the relatively low levels at the end of 1999, and an
estimated 12 per cent growth in consumption for
primary nickel in applications other than stainless steel.

In 2000, world primary nickel supply production
increased by an estimated 78,000 tonnes to
1,105,000 tonnes, due mainly to a rise in primary nickel
production in the Western World of approximately
52,000 tonnes, reflecting the return to more normal levels
of production by several producers who either had experienced
unexpected production disruptions or reduced output in 1999, and
production from new nickel capacity and the continued
commissioning of the three new laterite projects in Australia
referred to above. Demand for nickel in 2000 exceeded supply by
approximately 4,000 tonnes, but we believe that additional
material was withheld from the market by one leading nickel
producer, thereby reducing apparent stocks to critically low
levels, as reflected in nickel inventories held in LME
warehouses, which fell by over 37,000 tonnes during the
year.

11



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##### Table of Contents



The nickel market in 2001 was a challenging one
compared with 2000 when total world demand for primary nickel
achieved a record level. Market fundamentals weakened during
2001 as the worlds major economies experienced softness
and recessionary conditions intensified in the manufacturing
sectors of virtually all of the major countries that are members
of the Organization for Economic Cooperation and Development
(OECD). This overall weakness in demand was
primarily concentrated within the Western World where nickel
demand declined significantly. While there was continued
strength in nickel demand in China in 2001, the Company
estimates that there was an overall decline in world nickel
demand in 2001 of 2.2 per cent to approximately
1,085,000 tonnes. Growth in world primary nickel production
continued in 2001, reflected in a net increase of
40,000 tonnes to 1,145,000 tonnes. The largest sources
of this increase in supply were the continued ramping up of
certain laterite projects in Australia and the commissioning of
new capacity in Venezuela and Colombia. With the decline in
demand and increase in supply, the world nickel market in 2001
shifted to a surplus position of approximately
60,000 tonnes following the deficit positions in the
previous two years. Over 2001, nickel inventories held by
consumers are estimated to have fallen by 13,000 tonnes and
despite the slowdown LME inventories increased by only
9,510 tonnes, with such inventories ending 2001 at
19,188 tonnes.

The cash nickel price on the LME opened 2001 at
$6,995 per tonne ($3.17 per pound) but, subject to some
variability, declined to the years low of $4,420 per tonne
($2.00 per pound) in late October 2001. With the aggressive
reduction of interest rates in the United States and renewed
prospects for an economic recovery, prices for nickel and other
non-ferrous metals improved in the fourth quarter of 2001 and
the LME cash nickel price had increased to $5,680 per tonne
($2.58 per pound) as of December 31, 2001.

The nickel market strengthened in 2002 as demand,
on a world basis, grew by approximately eight per cent during
the year to 1,168,000 tonnes despite continued weakness in
certain large segments of the global economy. During 2002,
growth in industrial production continued in China and rebounded
in most major Asian economies, excluding Japan, while economic
recovery in the United States, Europe and Japan struggled to
take hold.

The growth in nickel demand in 2002 was primarily
concentrated in the stainless steel sector. Nickel demand growth
in this sector increased by almost 10 per cent, driven
by an increase in stainless steel production and a decline in
the percentage of nickel-containing stainless steel scrap
relative to primary nickel consumed by stainless steel
producers. World stainless steel production increased by
7.9 per cent to approximately
20.3 million tonnes with growth experienced in all
major industrial countries of the world except Japan where
production declined slightly. This production growth was
particularly strong in the United States, up
20 per cent, driven by the opening of a new 800,000
tonne-per-year stainless steel production facility in Kentucky
and higher production at existing facilities elsewhere in the
United States, and in Taiwan, where production increased by
20 per cent as existing facilities operated at
near-capacity levels.

Growth in primary nickel supply continued in 2002
as several relatively new or greenfield projects
located in South America and Australia continued to increase
production to their expected design capacities. The overall
increase in nickel supply in 2002 came principally from
(1) Colombia and Venezuela, where new or
greenfield projects were completing their ramp-up to
their design capacities, (2) Australia, where production
increased from the continued ramp-up of one project and higher
production from certain existing producers, and (3) Japan,
where production in the form of ferronickel rebounded to
near-capacity levels.

The LME cash nickel price opened 2002 at $5,680
per tonne ($2.58 per pound) and increased during the first half
of 2002 as the economies of certain industrialized countries
began to recover from their relatively low fourth quarter 2001
levels, ending the first half of the year at $7,080 per tonne
($3.21 per pound). Prices declined through the third quarter,
reaching a low of $6,305 per tonne ($2.86 per pound) in
September 2002 as concern over the pace of economic recovery and
uncertainty about a potential war with Iraq adversely affected
the nickel markets. The LME cash nickel price recovered in the
fourth quarter, underpinned by improving fundamentals for
nickel, ending 2002 at $7,100 per tonne
($3.22 per pound).

The strong growth in nickel demand during 2002,
largely offset the growth in nickel production, resulting in an
essentially balanced market for 2002 as it is estimated by Inco
that the world market reflected a small surplus of approximately
3,000 tonnes. Inventories of nickel on the LME increased
slightly during 2002 by 2,784 tonnes, remaining at a
relatively low level of 21,972 tonnes at December 31,
2002.

12



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##### Table of Contents



The global nickel market reflected favourable
fundamentals for nickel producers such as ourselves in 2003 as
world demand grew by approximately seven per cent from 2002
levels to 1,251,000 tonnes despite continued economic weakness
in Europe and a delayed economic recovery in the United States.
Industrial production in Asia grew during 2003, led by continued
significant growth in China, as well as growth in South Korea,
Taiwan and Japan. The global nickel market was essentially in
balance for 2003 as a result of the release into the market of
approximately 60,000 tonnes (132 million pounds) of
nickel or about five per cent of total global nickel supply that
we understand one leading nickel producer had initially pledged
as collateral for a loan.

The growth in nickel demand in 2003 was
concentrated in the stainless steel sector, the largest end user
of primary nickel. Nickel demand growth in this sector increased
by almost eight per cent in 2003, driven by a significant
increase in stainless steel production and a decline in the
stainless steel scrap-ratio. The world production of stainless
steel increased by nine per cent to approximately
22 million tonnes in 2003. This growth was due, in part, to
increases in production capacity and the start-up of several new
large-scale stainless steel manufacturing facilities around the
world. Stainless steel production expanded in all major
industrial regions and was particularly strong in China and
South Korea where new production facilities were commissioned
during the year. Nickel demand growth in non-stainless steel
applications was relatively weak in 2003, as one important
end-use market, high nickel alloys for the aerospace industry,
continued to struggle with new aircraft orders remaining at
relatively depressed levels. However, demand for nickel in
plating applications was relatively strong, led by growth in
these applications in China, slightly offset by reduced demand
for these applications in Europe and the United States.

The growth in world supply of primary nickel in
2003 could not keep pace with the demand growth experienced in
2003. Supply of primary nickel in 2003 was adversely affected by
a strike at the Companys Ontario operations during a
three-month period beginning June 1, 2003 which resulted in
effectively no production from these operations which would
normally produce about 20 million pounds of primary nickel
per month. We believe that several other major producers failed
to reach their 2003 projected production targets due to
unexpected maintenance or operational problems. The shortfall in
supply was partially offset by the gradual release of
approximately 60,000 tonnes into the market during 2003 by one
leading nickel producer, as discussed above. In addition,
production of ferronickel in Australia, New Caledonia, Colombia
and the Dominican Republic increased in 2003. As a result, world
primary nickel production increased by 21,500 tonnes to
1,192,000 tonnes in 2003. World primary nickel supply
increased to 1,192,000 tonnes taking into account the release of
the 60,000 tonne loan collateral mentioned above.

The significant growth in nickel demand during
2003, coupled with the limited supply growth, created an
underlying deficit between supply and demand in 2003 of
approximately 59,000 tonnes. With the release of the
60,000 tonne loan collateral referred to above, we believe
there was a small surplus in the global nickel market of
approximately 1,000 tonnes in 2003. Inventories of nickel on the
LME, a physical market (i) where various metals, including
nickel, can be bought or sold for prompt or future delivery and
(ii) representing the principal terminal market for primary
nickel in the world, increased slightly during 2003 by 2,100
tonnes, remaining at a relatively low level of
24,072 tonnes at December 31, 2003. As of
March 12, 2004, given the significant drawdown in these
reported inventories during the first nearly two and one-half
months of 2004, LME inventories totalled 14,316 tonnes.

An uncertain global economic environment would be
expected to have a significant adverse effect on Incos
business and financial results given the historical positive
correlation between industrial production and demand for primary
nickel and the Companys other products. There can be no
assurance that the over supply situations which have existed
historically in the nickel markets could not reoccur in the
future. Any such conditions would have an adverse effect on the
prices realized by Inco for its nickel products. Other
international economic trends, expectations of inflation and
political events in major nickel producing and consuming
countries can also adversely affect nickel prices and the prices
of other metals produced by the Company. These factors are
beyond the Companys control and have resulted, and are
expected to continue to result, in a high degree of price
volatility for nickel and other primary metals produced by Inco.
There can be no assurance that the price for nickel or other
metals produced by Inco will not decline. A return to the
relatively low price of nickel reflected by the LME cash nickel
price which prevailed through most of 1998 and into the first
half of 1999 and during a

13



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portion of the second half of 2001 would have a
material adverse effect on the Companys results of
operations, financial condition, cash flows and liquidity.


World primary nickel demand has increased at an
average compound annual rate of approximately six per cent over
the last ten years. As noted under Applications for
Nickel above, about two-thirds of world primary nickel
demand is associated with the production of austenitic stainless
steels. The following table shows the relationship between
Incos most recent estimates of world primary nickel demand
and stainless steel production for the five years ended
December 31, 2003:

|        |  |                |           |                         |  |  |      | 
|------- |  | -------------- | --------- | ----------------------- |  |  | ---- | 
|        |  | World          |           | World                  
|        |  | Primary Nickel |           | Stainless Steel        
|Year    |  | Demand(1)      |           | Production             
|        |  |                |           |                        
|        |  | (in tonnes)    |           | (in millions of tonnes)
|1999    |  |                | 1,048,000 |                         |  |  | 17.9 | 
|2000    |  |                | 1,109,000 |                         |  |  | 19.5 | 
|2001    |  |                | 1,085,000 |                         |  |  | 18.8 | 
|2002    |  |                | 1,168,000 |                         |  |  | 20.3 | 
|2003(2) |  |                | 1,251,000 |                         |  |  | 22.0 | 



---



|    |                                                                                    
|--- | -----------------------------------------------------------------------------------
|(1) | Previously disclosed figures were provided on a
    Western World-plus-China basis.
|(2) | Preliminary estimates.                                                             

The following table shows Incos most recent
estimates of world primary nickel demand, world primary nickel
supply, year-end combined Western World producers and LME
inventories of primary nickel year-end LME nickel inventories
and the average annual LME cash nickel prices for the five years
ended December 31, 2003:

|     |  |             |           |               |  |                     |           |              |  |             |         |     |  |  |        |  |  |   |       | 
|---- |  | ----------- | --------- | ------------- |  | ------------------- | --------- | ------------ |  | ----------- | ------- | --- |  |  | ------ |  |  | - | ----- | 
|     |  | World       |           | World         |  | Year-End            |           |              |  | Average    
|     |  | Primary     |           | Primary       |  | Combined Western    |           |              |  | Annual LME 
|     |  | Nickel      |           | Nickel        |  | World Producers and |           | Year-End LME |  | Cash Nickel
|Year |  | Demand      |           | Supply        |  | LME Inventories(2)  |           | Inventories  |  | Prices     
|     |  |             |           |               |  |                     |           |              |  |            
|     |  |             |           |              
|     |  | (in tonnes) |           | ($ per tonne)
|1999 |  |             | 1,048,000 |               |  |                     | 1,027,000 |              |  |             | 120,000 |     |  |  | 46,962 |  |  | $ | 6,015 | 
|2000 |  |             | 1,109,000 |               |  |                     | 1,105,000 |              |  |             | 90,000  |     |  |  | 9,678  |  |  |   | 8,642 | 
|2001 |  |             | 1,085,000 |               |  |                     | 1,145,000 |              |  |             | 106,000 |     |  |  | 19,188 |  |  |   | 5,948 | 
|2002 |  |             | 1,168,000 |               |  |                     | 1,171,000 |              |  |             | 100,000 |     |  |  | 21,972 |  |  |   | 6,775 | 
|2003 |  |             | 1,251,000 | (1)           |  |                     | 1,192,000 | (1)          |  |             | 104,000 | (1) |  |  | 24,072 |  |  |   | 9,633 | 



---



|    |                                                                                      
|--- | -------------------------------------------------------------------------------------
|(1) | Preliminary estimates.                                                               
|(2) | Excludes Russia, other members of the former CIS,
    China, Cuba and Eastern Europe.

Future nickel consumption and nickel prices could
be adversely affected by a number of factors, including the
development of new nickel capacity, such as the new capacity
described below under Participants in the Nickel
Industry; new processing technologies which have made, and
are expected to continue to make, the development of relatively
low-grade lateritic nickel deposits economically viable;
decreases in the general level of economic and business activity
in industrial economies which, in turn, could lead to reduced
production of stainless steel; levels of nickel-containing
stainless steel scrap and other sources of secondary nickel;
increased environmental restrictions affecting the production
and use of nickel and nickel-containing products;
recommissioning of any currently remaining shutdown nickel
capacity; and, in the longer term, increased use of substitutes,
including plastics and ceramics, for nickel-containing
materials. In addition, the future levels of production and
consumption of nickel in Russia are expected to continue to have
significant, but unpredictable, effects on world nickel prices.






| |                                    
| | -----------------------------------
| | Participants in the Nickel Industry

The six largest suppliers in the nickel industry,
each having its own integrated facilities, including nickel
mining, processing, refining and marketing operations, are MMC
Norilsk Nickel (Norilsk), Inco, Falconbridge

14



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##### Table of Contents



Limited (Falconbridge), BHP Billiton
plc (BHP Billiton), Eramet and its subsidiary, Le
Nickel-SLN (collectively, Eramet), and WMC Resources
Ltd. (WMC). The Company estimates that these six
producers accounted for about 60 per cent of the total
world primary nickel production in 2003. In addition to these
six principal participants, there are approximately 30 other
producers in numerous other countries around the world that
participate in the nickel industry. Operations of the six
largest producers are located in several countries. Inco, as
noted on page 1 of this Report, has operations in Canada,
the United Kingdom, Indonesia, Japan and China and in other
parts of Asia through two companies, Taiwan Nickel and Korea
Nickel, in whose refining capacity Inco has interests, but less
than majority ownership. Norilsk has operations in Russia; WMC
has operations in Australia; Falconbridge has operations in
Canada, Norway and the Dominican Republic; Eramet has operations
in France and New Caledonia; and BHP Billiton has operations in
Australia and Colombia.


Norilsk has integrated facilities at Norilsk in
Siberia and at Pechenga and Severonickel on the Kola Peninsula
of Russia. For 2003, Norilsk reported production of
approximately 238,000 tonnes of nickel from all of its
facilities, compared with 218,000 tonnes in 2002 and
228,000 tonnes in 2001, and exports of 239,000 tonnes in
2003, compared with 208,000 tonnes in 2002 and
182,000 tonnes in 2001.

World primary nickel supply is estimated by Inco
to have been approximately 1,192,000 tonnes in 2003, up
1.8 per cent from approximately 1,171,000 tonnes in
2002 and 1,145,000 tonnes in 2001. Production increases during
2003 were mainly from Norilsk in Russia, Jinchuan Group Limited
in China, BHP Billitons Cerro Matoso operation in
Colombia, Falconbridges operations in Canada and Norway
and its Falcondo subsidiarys ferronickel operations in the
Dominican Republic. However, these increases were largely offset
by lost production due to the three-month strike at our Ontario
operations.






| |                                           
| | ------------------------------------------
| | Incos Position in the Nickel
    Industry

Inco is a leading producer of nickel. The
Companys nickel deliveries in 2003 represented an
estimated 17 per cent of the total world demand for
primary nickel, compared with 20 per cent in 2002 and
21 per cent in 2001.

Incos total deliveries of nickel in 2003
were 213,890 tonnes, representing a decrease of eight per
cent from total deliveries of 231,590 tonnes in 2002.
Deliveries by Inco in 2003 of nickel produced at its own
facilities were 184,110 tonnes, representing a decrease of
13 per cent from deliveries of 212,247 tonnes in
2002. The decrease in deliveries was primarily due to lower
production at the Companys Ontario operations as a result
of the three-month strike referred to above which was partially
offset by higher nickel deliveries from PT Inco and the
Companys Manitoba operations and an increase in the
deliveries of purchased finished nickel. The Companys
Ontario operations normally produce about 9,000 tonnes
(20 million pounds) of nickel products per month.
Deliveries of finished nickel purchased from external sources,
used by the Company to supplement Inco-source production as
required, increased by 54 per cent in 2003 as a result
of the three-month strike referred to above.

In 2002, Incos total deliveries of nickel
increased slightly to 231,590 tonnes from total deliveries of
230,049 tonnes in 2001. Deliveries by Inco in 2002 of
nickel produced at its own facilities were 212,247 tonnes,
representing an increase of two per cent from deliveries of
207,071 in 2001, due to increased production of finished nickel
and sales from finished nickel inventories. Deliveries of
finished nickel purchased from external sources, used by the
Company to supplement Inco-source production as required,
declined in 2002 as a result of higher Inco production in 2002.

The Company believes that one of the key
strengths of its position in the highly-competitive global
nickel industry is the broad geographic distribution of its
customers. In 2003, the Company continued to supply its
customers worldwide from its operations in Canada, the United
Kingdom and Asia. In 2003, reflecting the Companys global
market presence, 21 per cent of the Companys
total primary nickel deliveries were to customers in the United
States and Canada, 25 per cent to customers in Japan,
12 per cent to customers in Europe, and
42 per cent to customers in other countries, primarily
in Asia, compared with 26 per cent to customers in the
United States and Canada, 24 per cent to customers in
Japan, 12 per cent to customers in Europe, and
38 per cent to customers in other countries, primarily
in Asia, in 2002. In 2003, sales to customers in Asia, including
Japan, represented 66 per cent of the Companys
total nickel deliveries for the year, compared with
60 per cent in 2002.

15



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##### Table of Contents



In 2003, the Company continued to implement
marketing strategies aimed at providing consistent long-term
demand for its products. At year-end 2003, the Company had
fixed-volume contracts with customers for a substantial portion
of its expected annual nickel sales. These contracts, combined
with the requirements of the Companys affiliated
refineries in Asia and its sales of proprietary nickel products,
have continued to provide stable demand for a significant
portion of the Companys annual production.

The three-month strike at the Companys
Ontario operations and the ramp-up problems experienced when
those operations were restarted after the end of the strike, as
discussed above, significantly and adversely affected the
Companys production of primary nickel products, copper,
platinum-group metals and its other products.

The following table shows, for the five years
ended December 31, 2003, Incos most recent estimates
of total world primary nickel demand, Incos total nickel
deliveries, Incos deliveries of purchased nickel,
Incos estimated share of world demand based on its total
nickel deliveries, the LME average cash and three-month nickel
prices and Incos average realized price for its primary
nickel products:

|     |  |               |           |               |  |               |         |          |  |         |        |         |  |          |    |     |  |  |       |  |  |  |       |  |  |  |       | 
|---- |  | ------------- | --------- | ------------- |  | ------------- | ------- | -------- |  | ------- | ------ | ------- |  | -------- | -- | --- |  |  | ----- |  |  |  | ----- |  |  |  | ----- | 
|     |  |               |           |               |  |               |         |          |  | LME     |        | LME     |  | Inco    
|     |  |               |           |               |  | Inco          |         | Inco     |  | Average |        | Average |  | Average 
|     |  |               |           |               |  | Deliveries of |         | Share of |  | Cash    |        | 3-Month |  | Realized
|     |  | World Primary |           | Total Inco    |  | Purchased     |         | World    |  | Nickel  |        | Nickel  |  | Nickel  
|Year |  | Nickel Demand |           | Deliveries(1) |  | Nickel        |         | Demand   |  | Price   |        | Price   |  | Price(1)
|     |  |               |           |               |  |               |         |          |  |         |        |         |  |         
|     |  |               |           |               |  |              
|     |  | (in tonnes)   |           | (%)           |  | ($ per tonne)
|1999 |  |               | 1,048,000 |               |  |               | 258,088 |          |  |         | 77,038 |         |  |          | 25 |     |  |  | 6,015 |  |  |  | 6,073 |  |  |  | 6,415 | 
|2000 |  |               | 1,109,000 |               |  |               | 259,374 |          |  |         | 60,277 |         |  |          | 23 |     |  |  | 8,642 |  |  |  | 8,453 |  |  |  | 9,007 | 
|2001 |  |               | 1,085,000 |               |  |               | 230,049 |          |  |         | 22,978 |         |  |          | 21 |     |  |  | 5,948 |  |  |  | 5,877 |  |  |  | 6,468 | 
|2002 |  |               | 1,168,000 |               |  |               | 231,590 |          |  |         | 19,343 |         |  |          | 20 |     |  |  | 6,775 |  |  |  | 6,755 |  |  |  | 7,143 | 
|2003 |  |               | 1,251,000 | (2)           |  |               | 213,890 |          |  |         | 29,780 |         |  |          | 17 | (2) |  |  | 9,633 |  |  |  | 9,610 |  |  |  | 9,860 | 



---



|    |                                             
|--- | --------------------------------------------
|(1) | Includes intermediates and purchased nickel.
|(2) | Preliminary estimates.                      






| |                      
| | ---------------------
| | Inco Special Products

The Company is a world leader in the development,
production and sale of value-added or specialty nickel products,
including powders, foams, flakes, oxides and nickel-coated
graphite. These products are used for such applications as
consumer electronics, rechargeable batteries for consumer and
hybrid vehicle use, fuel cells, powder metallurgy, automotive
parts, electromagnetic interference shielding for computers and
cellular telephones, special catalysts and salts, metal
injection moulding, and hard metal binders.

Inco Special Products, an unincorporated business
unit, has responsibility for all business activities related to
the Companys value-added or specialty nickel products.
Incos value-added or specialty nickel products are
developed at the Companys research laboratory at
Mississauga, Ontario and are manufactured, using the
Companys gas decomposition technology, at the
Companys refineries in Sudbury, Ontario and Clydach,
Wales; and certain value-added or specialty products are also
manufactured at Novamet(3) Specialty Products
Corporation (Novamet), a wholly-owned subsidiary of
the Company located in Wyckoff, New Jersey. Inco Special
Products expects to continue to work closely with customers to
develop advanced nickel products to meet their needs. Accounting
for approximately nine per cent of the Companys nickel
sales revenue in 2003, compared with 12 per cent in
2002 and 2001, value-added or specialty nickel products sold at
premium prices. These premiums are affected by fluctuations in
the LME cash nickel price and how the Company prices certain of
its value-added or specialty nickel products.






| |       
| | ------
| | Copper

Inco produces copper at its Ontario operations
which it recovers, in conjunction with nickel, principally from
the sulphide ores mined in the Sudbury area of Ontario. In 2003,
the Companys copper production was 91,134 tonnes,
representing a decrease of 18 per cent from 111,787
tonnes in 2002. Copper production in 2003 was



---

|    |                
|--- | ---------------
|(3) | Inco trademark.

16



---



##### Table of Contents



below the Companys planned target of
113,000 tonnes due to the three-month strike and ramp-up
problems associated with the restart of operations after the
three-month strike at the Companys Ontario operations. In
2002, the Companys copper production was down four percent
from 116,255 tonnes in 2001, due to production and mechanical
difficulties experienced during the year at the Companys
Ontario operations.


The Companys copper is sold to industrial
users under the trademark ORC(4). In 2003, all of the
Companys copper production was sold in North America at
prices based on quotations on the COMEX Division of the New York
Mercantile Exchange. Copper accounted for $171 million, or
seven per cent, of the Companys total net sales to
customers in 2003, compared with $184 million, or nine per
cent, in 2002 and $195 million, or nine per cent, in 2001.

The Companys sales and deliveries
(including purchased copper) for the past three years and the
Companys average realized prices for copper for the past
five years are shown in the tables under Sales,
Deliveries and Prices  Copper
above, respectively.

World refined copper production is estimated to
have been approximately 15.2 million tonnes in 2003,
compared with 15.5 million tonnes in 2002 and
15.3 million tonnes in 2001.

Like nickel prices, copper prices have been in
recent years, and are expected to continue to be, subject to
significant price volatility. In 2002, LME and COMEX inventories
continued to increase until they peaked in the second quarter as
a result of production cutbacks announced during the fourth
quarter of 2001 and higher demand, particularly from China,
which began to have a positive impact on the overall copper
market supply-demand balance. Prices also peaked in the second
quarter and declined during the remainder of the year as
economic uncertainty and a lack of demand growth negatively
affected overall copper market sentiment. Total LME and COMEX
inventories ended the year at 1,255,000 tonnes, an increase of
25 per cent from these combined inventory levels at
the end of 2001, but lower than the peak of 1,306,000 tonnes for
2002 reached in the second quarter. In 2003, the combination of
strong economic growth in Asia, in particular China, combined
with a number of production cutbacks and the actions of one
leading copper producer which we understand stockpiled material,
led to accelerating declines in reported stocks throughout 2003.
By the end of 2003, reported copper stocks on the COMEX and the
LME declined by over 40 per cent to 711,100 tonnes.
The COMEX first position price averaged $1,787 per tonne
($0.81 per pound) in 2003, a 13 per cent increase from
$1,580 per tonne ($0.72 per pound) in 2002, and was
$2,886 per tonne ($1.31 per pound) on March 12,
2004.






| |                                              
| | ---------------------------------------------
| | Other Primary Metals and Related
    Products

Sales of Incos primary metals and related
products other than nickel and copper accounted for eight per
cent of its total net sales to customers in 2003, compared with
15 per cent in 2002 and 19 per cent in 2001.
These products include cobalt, platinum-group metals (platinum,
palladium, rhodium, ruthenium and iridium), gold, silver,
sulphuric acid and liquid sulphur dioxide and some modest
quantities of selenium and tellurium. For 2003, Inco, based upon
production principally from its Ontario ores, accounted for
approximately two per cent of the worlds supply of
platinum-group metals. Platinum-group metals are utilized
primarily for catalysts, electronic components and jewelry. In
addition to refining its own ores to obtain platinum-group
metals, the Company processes substantial volumes of spent
automotive catalytic converters and other material containing
these metals at its Sudbury, Ontario and Acton, England
refineries. In 2003, due principally to the post-strike ramp-up
problems discussed above at the Companys Ontario
operations, such other material, which was principally
toll-refined, accounted for about 76 per cent of all
platinum-group metals refined by the Company, compared with
60 per cent in 2002 and 69 per cent in 2001.
Deliveries of toll-refined material, however, are not included
in the Companys deliveries of precious metals shown in the
table under Deliveries above since Inco does not
take ownership of these materials. As a result primarily of the
reduced quantities of platinum-group metals produced by the
Company given the three-month strike, sales of platinum-group
metals accounted for approximately four per cent of the
Companys net sales to customers in 2003, compared with
11 per cent in 2002 and 13 per cent in 2001.
The platinum-group metals sold in 2003 were derived principally
from the Companys Ontario ores.





---

|    |                
|--- | ---------------
|(4) | Inco trademark.

17



---



##### Table of Contents



Approximately 80 per cent of
Incos cobalt production, which is derived from the
Companys Canadian ores and purchased feedstock material,
is sold as metal, with the balance being sold as cobalt oxide.
Cobalt oxide, which normally commands a price premium over
cobalt metal, is used primarily in the chemical industry. Cobalt
metal is used in the production of various alloys, particularly
for aerospace applications.

Copper and nickel producers supply a majority of
the worlds cobalt production as a by-product of their
copper and nickel operations, which has resulted in the supply
of cobalt being largely driven by the demand for copper and
nickel rather than the demand for cobalt. As a result, there has
been a significant increase in the supply of cobalt in the last
decade. Demand for cobalt from the aerospace and land-based gas
turbine sectors, which together currently represent about
23 per cent of world cobalt consumption, continued to
be weak in 2003. However, in 2003 the total demand for cobalt
increased as a result of the growth of applications for cobalt
in the battery and catalyst market sectors. The increases in
cobalt demand as a result of these applications, together with
supply disruptions, resulted in a more balanced market. With
supply and demand moving closer into balance during 2003, the
Metal Bulletin 99.8 per cent average reference price
for cobalt, the most commonly used benchmark price for cobalt
pricing, averaged $19,330 per tonne ($8.77 per pound) in the
first half of the year and $26,570 per tonne ($12.05 per pound)
in the second half of the year, compared with $15,700 per tonne
($7.10 per pound) in 2002 and $23,300 per tonne ($10.60 per
pound) in 2001. On March 11, 2004, the Metal Bulletin
99.8 per cent average reference price for cobalt was
$60,627 per tonne ($27.50 per pound).

As indicated in the table of the Companys
price realizations under Prices  Other
Metals above, Incos average realized price for its
cobalt deliveries was $18,846 per tonne ($8.55 per pound) in
2003, compared with $15,124 per tonne ($6.86 per pound) in 2002
and $23,216 per tonne ($10.53 per pound) in 2001. The
Companys Goro and Voiseys Bay projects, in addition
to the quantities of nickel projected to be produced by them,
are also expected to produce significant quantities of cobalt
given the currently estimated quantities of cobalt in the
mineral deposits to be mined as part of these projects. With
significant increases in the global supply of cobalt and changes
in demand, the price of cobalt has fluctuated significantly over
the past several years. The financial analyses undertaken by the
Company in support of the substantial investment to be made with
respect to these projects have been based upon a long-term price
of cobalt of $15,400 per tonne ($7.00 per pound). If realized
cobalt prices, as well as realized prices for the other metals
to be produced by these projects, were to be below the long-term
prices assumed by the Company, the expected financial returns
from, and expected cash and other unit costs of production after
by-product credits for, these projects would be adversely
affected.

The Company also produces sulphuric acid and
liquid sulphur dioxide from the sulphur dioxide gases captured
as part of its sulphur dioxide (SO2) abatement program at the
Companys Ontario operations. A total of 473,805 tonnes of
sulphuric acid and liquid sulphur dioxide were produced by the
Company in 2003, compared with 673,995 tonnes in 2002 and
650,651 tonnes in 2001. Most of the Companys sulphuric
acid production and all of its liquid sulphur dioxide production
are sold to Chemtrade Logistics Inc., an unaffiliated customer,
under long-term contractual arrangements at prices based on
prevailing market prices for these products. These products are
included in the table of product deliveries under
Deliveries above.

Tables showing the Companys sales,
deliveries and average net realized prices of these other
primary metals and related products are shown under
Sales, Deliveries and
Prices  Other Metals above.






| |                      
| | ---------------------
| | Mining and Production





| |        
| | -------
| | General

Based on publicly available information and its
own studies and analysis, the Company believes that, relative to
other nickel producers, it is a low-cost producer of nickel.
Since low-cost operations are essential in the highly
competitive global nickel business, one of Incos key
strategic objectives is to become the worlds lowest-cost
and most profitable producer of nickel. A number of favourable
factors, as described below, generally contribute to the
Companys current cost structure, with the contribution of
each factor varying from year to year. A number of other nickel
producers experienced some of the same cost pressures we did in
2003, including higher energy costs and the impact of the
strengthening in the currency which some or all of their costs
of production are incurred relative to the U.S. dollar, the
currency in which most or at least some of their revenue is
received.

18



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##### Table of Contents



The Companys estimated ore reserves include
both sulphide and laterite nickel deposits, the two main types
of nickel deposits found in the world. Sulphide deposits
currently account for about 30 per cent of the
worlds nickel resources and are found in bedrock, often
deep below the surface which generally make them more costly to
mine than laterite deposits. Sulphide deposits commonly contain
copper, precious metals and cobalt in addition to nickel.
Laterite deposits, which currently account for the remaining
70 per cent of the worlds nickel resources,
occur as either wet laterites or dry
laterites. Wet laterites are found in tropical areas where heavy
rainfall combined with suitable landforms have resulted in the
concentration of nickel through a process of surface weathering
and leaching action. Currently, wet laterites may be processed
by using either smelting or acid leaching technology, depending
on the characteristics of the particular deposit. Dry laterites,
such as those found in Australia, may be processed only by using
acid leaching technology due to their mineralogy and their
generally lower nickel content compared with wet laterites.
Laterite deposits are found at or near the surface and are
therefore usually amenable to low-cost surface mining. Cobalt is
also usually present in these deposits.

The Company has large sulphide orebodies with
satisfactory ore grades and metallurgical properties principally
at its operations at Sudbury, Ontario and certain sulfide
orebodies with generally declining ore grades at its Thompson,
Manitoba operations, and large lateritic orebodies with
satisfactory ore grades and metallurgical properties at its
operations in Indonesia. In addition to nickel, Inco recovers
significant quantities of copper, precious metals and cobalt
from its Ontario ores. The relative economic advantages of
Incos Canadian sulphide ores are offset, to some degree,
by the higher mining costs for sulphide ores relative to
lateritic ores and by higher costs of doing business in Canada
relative to some other nickel-producing countries. The
Companys unit costs of production also benefit from
economies of scale attributable to its large, integrated mining
and processing facilities and from the use of bulk mining
methods and automated mining equipment and other productivity
improvements implemented in recent years in all areas of the
Companys business.

Energy costs are a significant component of
production costs in the nickel industry since nickel production
is highly energy intensive, especially in respect of the
pyrometallurgical processing of lateritic ores. Inco enjoys
relatively low energy costs because of substantial production
from its Canadian sulphide ores, which consume only about
one-fifth the energy required to process lateritic ores. In
addition, low-cost energy is available from the Companys
hydroelectric facilities in Ontario and at PT Incos
lateritic mining operation in Indonesia, and from purchased
hydroelectric power at the Companys Manitoba operations.

In 2003, our hydroelectric facilities in Ontario
generated approximately 22 per cent of the
Companys Ontario operations electricity
requirements, and PT Incos 165-megawatt
hydroelectric-generating facility at its Larona dam together
with its 93-megawatt hydroelectric generating facility at its
Balambano dam generated virtually all of PT Incos
2003 electrical requirements. The Balambano facility has been
able to generate power consistently above its design capacity
due to improved water management practices and higher reservoir
levels and other related factors than were assumed in developing
its original design capacity. In 2003, energy costs at the
Companys Ontario and Manitoba operations were
approximately 14 per cent of total cash production
costs, compared with 36 per cent for PT Inco. The
availability of captive hydroelectric power decreased cash
energy costs at PT Inco by about 51 per cent in
2003, 47 per cent in 2002 and 50 per cent in
2001 relative to the energy costs that would have been incurred
by PT Inco if fuel oil had been the sole source to meet its
energy requirements.

Incos Ontario operations benefit
significantly, and its Companys Manitoba operations
benefit to a minor extent, from the copper, precious metals and
cobalt produced in association with nickel. In 2003, Ontario
ores accounted for approximately 96 per cent of the
Companys copper production, 94 per cent of its
by-product platinum-group metals production and 48 per cent
of its by-product cobalt production, with one per cent of the
Companys copper production, six per cent of its by-product
platinum-group metals production and 34 per cent of its
cobalt by-product production derived from the Companys
Manitoba ores. The Company also produces nickel, copper, cobalt
and precious metals from purchased materials. Precious metals
have relatively high selling values compared with the
Companys processing costs for these metals. Incos
accounting and financial reporting practice is to include
revenues from deliveries of copper, precious metals and cobalt
in net sales and to include costs of recovering such metals in
cost of sales. Copper is considered to be a joint product with
nickel and, as such, its production costs include an allocation
of mining costs plus its identifiable concentrating, smelting
and refining costs; precious metals and cobalt are considered to
be by-products and, as such, their production costs

19



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##### Table of Contents



include no allocation of mining, concentrating
and smelting costs, but do include their identifiable upgrading
and refining costs.


The Companys nickel production decreased by
11 per cent to 187,173 tonnes in 2003, compared with
209,728 tonnes in 2002, reflecting lower production at the
Companys Ontario operations due to the three-month strike
by production workers, ramp-up problems following the strike,
and completion of a planned furnace rebuild at PT Inco in
the first quarter, partially offset by higher production at the
Companys Manitoba operations, the processing of higher
volumes of purchased intermediates, and higher ore grades and
higher production at PT Inco. In 2002, the Companys
nickel production increased by one per cent to 209,728 tonnes
from 207,077 tonnes in 2001. The increase was primarily due to
the decision to operate the Companys Ontario operations in
2002 without any planned maintenance shutdown. Nickel production
in 2002 was, however, below the Companys planned
production of 213,000 tonnes that it had announced in February
2002. Our Manitoba operations in 2002 and early 2003 were
adversely affected by start-up problems concerning the 1-B
orebody of the Thompson mine and the adverse effect on
processing operations of the higher magnesium oxide
(MgO) content in the ores mined from the Manitoba
operations Birchtree mine. These issues were resolved in
2003. Production of finished nickel from Canadian ores and
purchased material processed in Canada totalled 120,479 tonnes
in 2003, compared with 146,620 tonnes in 2002 and 145,221 tonnes
in 2001. Additional nickel and copper production statistics for
the Companys primary metals operations are shown in the
tables under Concentrating, Smelting and Refining
below. For a discussion of PT Incos operating rates
and estimated ore reserves, see PT International
Nickel Indonesia Tbk  Operations below.

The Companys 2004 nickel production is
currently expected to be in the range of 227,000 to
231,000 tonnes, up substantially from the
187,173 tonne level in 2003. Nickel production in 2003 was
negatively impacted by the strike at our Ontario operations. The
Company expects purchased nickel intermediates to increase by
over 45 per cent from 2003 levels to approximately
33,570 tonnes in 2004. This external feed source is
expected to represent the source of 15 per cent of
planned 2004 finished nickel production, up from
23,130 tonnes in 2003 as discussed above. We continue to
utilize purchased nickel intermediates to increase the
processing capacity utilization of the Companys Ontario
and Manitoba operations and to maintain nickel production at the
Companys Manitoba operations at or near its
45,000 tonne annual capacity. While such use is profitable,
it does increase our costs, particularly at higher nickel prices
since the cost of purchased nickel feeds is based on prevailing
LME prices. Copper production is currently expected to be
approximately 118,000 tonnes in 2004, up
29 per cent from 91,134 tonnes in 2003. Total
production of platinum-group metals is expected to increase to
400,000 troy ounces in 2004 from the 2003 strike-affected
level of 207,000 troy ounces.

While the Company has certain potential new mine
development projects at its existing operations in Canada, if
sufficient new low-cost sources of nickel such as the
Voiseys Bay and Goro projects are not developed on a
timely basis, the Companys overall nickel production,
particularly at its Manitoba operations, could decline beginning
as early as 2005, and the Companys unit costs of
production could increase significantly with any material
decline in mine production from its Canadian operations if such
operations were not significantly restructured. These
developments could materially adversely impact the
Companys results of operations, financial condition,
profitability and cash flows.

During 2002, as mine production at the
Companys Manitoba operations transitioned from the
Thompson mine to the lower grade Birchtree mine, the Company
experienced lower mine production. The Company continued to
experience such lower mine production in 2003 and, as this
transition continues to move forward, the Company currently
expects to see a continuing decline in mine production in
Manitoba in 2004 and expects to see further declines in future
years. The Company has recently been relying, and expects that
it will continue to rely on an increasing basis, upon the
availability of purchased intermediates to maintain its
Manitobas nickel production at around the 45,000 tonne
annual level in 2004. While the Company has entered into
agreements and other arrangements to purchase intermediates to
maintain its Manitobas production levels at or near the
45,000 tonne annual level for the next few years, until the
Company is able to produce intermediate products from its
Voiseys Bay project for further processing at its Canadian
operations, in particular, the Companys Manitoba
operations, it will remain increasingly dependant, in order to
continue to produce nickel products at, or close to, their
capacity, on purchases of intermediate products principally from
two Australian companies. The Company has entered into
arrangements for the purchase of nickel-containing concentrates
from those two Australian

20



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##### Table of Contents



producers. Under these arrangements, these
producers are currently expected to provide an aggregate of
85,000 tonnes of nickel in concentrate form between 2004
and 2009 for further processing by the Companys Ontario
and Manitoba operations. If these suppliers experienced problems
in producing or shipping to Canada their intermediate products,
these events would have an adverse effect on the Companys
ability to produce and sell the nickel products it plans to
produce at least in 2004 and 2005 and it would adversely affect
the Companys results of operations, financial condition,
profitability and cash flows. Extended strikes, such as the one
the Company experienced at its Ontario operations in 2003, other
labour disruptions and unforeseen events could also adversely
affect the Companys production plans and costs and these
developments could also adversely affect the Companys
results of operations, financial condition, profitability and
cash flows.


The Company continues to explore its options to
fully utilize its existing Canadian facilities, including the
purchase of intermediates and additional external feedstocks
from existing or new suppliers and additional mine development.
In addition, Inco is seeking to develop new mines principally at
its Ontario operations to help sustain its production capacity
and reduce costs. Further information on these projects is set
out under Exploration and Project Development below.

The Companys copper production is currently
planned to increase to approximately 118,000 tonnes in 2004
from its 2003 strike-affected level and its total production of
platinum-group metals is planned to increase from its 2003
strike-affected level to 400,000 troy ounces in 2004.






| |                     
| | --------------------
| | Capital Expenditures

The primary focus of Incos capital
expenditures is to provide the Companys operations with
appropriate production capacity for its nickel and other primary
metals products and to develop new projects, including the
Voiseys Bay and Goro projects. Capital expenditures
totalled $591 million in 2003, compared with
$600 million in 2002 and $263 million in 2001. The
decrease in 2003, compared with 2002, was primarily due to lower
capital spending mainly in respect of our Goro project which was
partially offset by higher capital spending in respect of the
Voiseys Bay project.

Capital expenditures for the Goro project,
including capitalized interest, totalled $249 million in
2003, compared with $353 million in 2002 and
$84 million in 2001, and for the Voiseys Bay project
totalled $138 million in 2003, compared with
$73 million in 2002 and $9 million in 2001. The
balance of capital expenditures in each of the three years was
directed primarily to the development, maintenance and
improvement of new and existing mining operations in Canada and
productivity improvements and to meet environmental regulations
and similar requirements. The Company currently estimates that
its existing operations require, on an annual basis, capital
expenditures of approximately $255 million to sustain their
operations, including to meet existing environmental
requirements, at currently planned production and/or utilization
levels for these operations.

The Companys 2004 capital expenditures are
currently expected to total $1,040 million, including
approximately $430 million for the Voiseys Bay
project, approximately $220 million for the Goro project
and approximately $390 million in sustaining capital
expenditures for existing operations, of which about
$60 million will be required for environmental measures and
about $135 million will be used to help maximize or
increase production at existing operations, in particular at
PT Inco. Depreciation expense is projected to be
$305 million in 2004. The total capital expenditures for
the Voiseys Bay and Goro projects will depend on a number
of factors, including receipt of all necessary construction and
other permits and, in the case of the Goro project, the results
of the second phase of that projects review process, the
availability of certain tax-advantaged financing from the French
government and the acquisition of a minority interest in the
Goro project by one or more parties. For a discussion of the
results of the bankable feasibility study for the Voiseys
Bay project, see Voiseys Bay Nickel Company
Limited  Project Phases below.

21



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##### Table of Contents








| |       
| | ------
| | Mining

At December 31, 2003, the Company had the
following mines in operation in Canada:

|                   |  |          |           | 
|------------------ |  | -------- | --------- | 
|Ontario            |  | Manitoba
|                   |  |         
|Copper Cliff North |  |          | Birchtree | 
|Copper Cliff South |  |          | Thompson  | 
|Creighton(1)       |  |          |           | 
|Garson             |  |          |           | 
|Gertrude           |  |          |           | 
|McCreedy/Coleman   |  |          |           | 
|Stobie             |  |          |           | 



---



|    |                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------
|(1) | Excludes Creighton 3 located near the main
    Creighton mine and accessible by a separate shaft and ramp.

All of the mines listed above are underground
mines except for the Gertrude mine which is an open pit mine. In
addition to these operating mines, the Companys Ontario
operations include several non-operating mines or mines on
standby which contain estimated ore reserves as indicated in the
tables for the Total Estimated Ore Reserves as of Year-End
2002 and 2003 under Ore Reserves and Mining
Rights below.

The following maps show the location of the
operating mines, non-operating mines, currently undeveloped
properties and processing and other facilities at the
Companys Ontario and Manitoba operations.

Ontario Operations

Location of Operating Mines, Non-Operating
Mines, Undeveloped Properties and


Processing and Other Facilities


(ONTARIO OPERATIONS MAP)

22



---



##### Table of Contents



Manitoba Operations

Location of Operating Mines, Non-Operating
Mines and Processing and other Facilities


(MANITOBA OPEARTIONS MAP)

For further information on the development
projects or undeveloped properties at the Companys Ontario
and Manitoba operations, see Exploration and Project
Development below.

The tables below set forth the Companys
annual mine production in thousands of tonnes by operating mine
or for PT Inco on an aggregate basis since it has mining
areas, and the average grades (in %) of certain metals (nickel
(Ni); copper (Cu)), for the Companys Ontario operations,
the Companys Manitoba operations and PT Inco for 2001,
2002 and 2003. For the Companys Manitoba and Ontario
operations, the production and average grades represent the mine
product delivered to those operations respective process
plants and do not include adjustments due to beneficiation,
smelting or refining. The mine production at PT Inco represents
the product from PT Incos dryer kilns and delivered to PT
Incos smelting operations (Dry Kiln Product or
DKP) and does not include nickel losses due to
smelting.

23



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##### Table of Contents



ANNUAL MINE PRODUCTION

Tonnes in 000


|                                    |  |  |        |      |  |      |       |      |  |  |       |  |  |  |       | 
|----------------------------------- |  |  | ------ | ---- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|                                    |  |  |        | 2001 |  | 2002 |       | 2003
|                                    |  |  |        |      |  |      |       |     
|Ontario Operations Operating Mines  |  |  |        |      |  |      |       |      |  |  |       |  |  |  |       | 
|Copper Cliff North                  |  |  | Tonnes |      |  |      | 889   |      |  |  | 986   |  |  |  | 701   | 
|                                    |  |  | Cu%    |      |  |      | 1.98  |      |  |  | 1.29  |  |  |  | 1.16  | 
|                                    |  |  | Ni%    |      |  |      | 1.55  |      |  |  | 1.18  |  |  |  | 1.21  | 
|Copper Cliff South                  |  |  | Tonnes |      |  |      | 964   |      |  |  | 1,035 |  |  |  | 769   | 
|                                    |  |  | Cu%    |      |  |      | 1.94  |      |  |  | 2.27  |  |  |  | 2.50  | 
|                                    |  |  | Ni%    |      |  |      | 1.82  |      |  |  | 1.89  |  |  |  | 1.80  | 
|Crean Hill(1)                       |  |  | Tonnes |      |  |      | 268   |      |  |  | 261   |  |  |  |       | 
|                                    |  |  | Cu%    |      |  |      | 1.46  |      |  |  | 1.29  |  |  |  |       | 
|                                    |  |  | Ni%    |      |  |      | 1.91  |      |  |  | 1.75  |  |  |  |       | 
|Creighton                           |  |  | Tonnes |      |  |      | 1,019 |      |  |  | 912   |  |  |  | 713   | 
|                                    |  |  | Cu%    |      |  |      | 1.55  |      |  |  | 1.53  |  |  |  | 1.53  | 
|                                    |  |  | Ni%    |      |  |      | 2.08  |      |  |  | 2.14  |  |  |  | 2.10  | 
|Stobie                              |  |  | Tonnes |      |  |      | 2,582 |      |  |  | 2,792 |  |  |  | 2,222 | 
|                                    |  |  | Cu%    |      |  |      | 1.00  |      |  |  | 0.91  |  |  |  | 0.83  | 
|                                    |  |  | Ni%    |      |  |      | 1.10  |      |  |  | 0.98  |  |  |  | 0.90  | 
|Garson                              |  |  | Tonnes |      |  |      | 631   |      |  |  | 584   |  |  |  | 434   | 
|                                    |  |  | Cu%    |      |  |      | 1.14  |      |  |  | 1.15  |  |  |  | 1.10  | 
|                                    |  |  | Ni%    |      |  |      | 1.82  |      |  |  | 1.92  |  |  |  | 1.87  | 
|McCreedy East/ Coleman              |  |  | Tonnes |      |  |      | 1,173 |      |  |  | 1,084 |  |  |  | 870   | 
|                                    |  |  | Cu%    |      |  |      | 3.19  |      |  |  | 3.19  |  |  |  | 3.57  | 
|                                    |  |  | Ni%    |      |  |      | 1.73  |      |  |  | 1.69  |  |  |  | 1.78  | 
|Gertrude(2)                         |  |  | Tonnes |      |  |      |       |      |  |  | 156   |  |  |  | 453   | 
|                                    |  |  | Cu%    |      |  |      |       |      |  |  | 0.37  |  |  |  | 0.36  | 
|                                    |  |  | Ni%    |      |  |      |       |      |  |  | 1.09  |  |  |  | 1.01  | 
|Total Ontario Operations            |  |  | Tonnes |      |  |      | 7,527 |      |  |  | 7,810 |  |  |  | 6,162 | 
|                                    |  |  | Cu%    |      |  |      | 1.68  |      |  |  | 1.57  |  |  |  | 1.53  | 
|                                    |  |  | Ni%    |      |  |      | 1.57  |      |  |  | 1.45  |  |  |  | 1.39  | 
|Manitoba Operations Operating Mines |  |  |        |      |  |      |       |      |  |  |       |  |  |  |       | 
|Thompson                            |  |  | Tonnes |      |  |      | 1,520 |      |  |  | 1,433 |  |  |  | 1,393 | 
|                                    |  |  | Ni%    |      |  |      | 2.7   |      |  |  | 2.58  |  |  |  | 2.21  | 
|Birchtree                           |  |  | Tonnes |      |  |      | 431   |      |  |  | 425   |  |  |  | 640   | 
|                                    |  |  | Ni%    |      |  |      | 1.61  |      |  |  | 1.78  |  |  |  | 1.83  | 
|Total Manitoba Operations           |  |  | Tonnes |      |  |      | 1,951 |      |  |  | 1,858 |  |  |  | 2,033 | 
|                                    |  |  | %Ni    |      |  |      | 2.46  |      |  |  | 2.40  |  |  |  | 2.09  | 
|PT Inco Operations                  |  |  | Tonnes |      |  |      | 4,187 |      |  |  | 3,137 |  |  |  | 3,891 | 
|                                    |  |  | %Ni    |      |  |      | 1.70  |      |  |  | 1.71  |  |  |  | 1.91  | 



---



|    |                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Crean Hill Mine was closed in 2002.                                                                                                                    
|(2) | The Gertrude open pit mine did not operate in
    2001. This open pit mine is operated as required based on market
    conditions and plant capacities.

24



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##### Table of Contents






Concentrating,
Smelting and Refining

The conversion of nickel ore mined from the
Companys sulphide deposits in Canada into commercially
marketable products requires various processing and refining
steps undertaken at concentrators, smelters and refineries. The
ore is first crushed and ground, the sulphides are separated
into concentrates, and the concentrates are then smelted to
produce nickel matte, an intermediate product containing
approximately 75 per cent nickel plus copper. The matte is
then refined to produce primary nickel and copper products.

The Companys processing facilities in
operation during 2003 in the Sudbury area included a
concentrator, a combined nickel and copper smelter, matte
processing facilities, a nickel refinery, a copper refinery, a
silver refinery, a sulphuric acid plant and a sulphur dioxide
liquefaction plant. Nickel matte produced in Sudbury is refined
in Sudbury and other locations into nickel pellets, nickel
powders, UTILITY(5) nickel, nickel discs and Nickel
Oxide Sinter 75(6) , a product containing
approximately 75 per cent nickel. In Thompson, Manitoba,
the Company has a concentrator, a nickel smelter and an
electrolytic nickel refinery. Certain nickel products produced
in Sudbury and Thompson are finished at Port Colborne.

Finished nickel is also produced at our refinery
at Clydach, Wales. The Clydach refinery processes material
supplied from Incos operations in Canada. At Port
Colborne, the Company also operates an electrocobalt refinery
and a precious metals upgrading facility. The majority of the
Companys silver production is refined at Copper Cliff,
Ontario and its gold production is refined under a tolling
arrangement with the Royal Canadian Mint. This by-product
production is reflected in the tables under Sales
and Deliveries above. A refinery at Acton, England
produces platinum-group metals from upgraded concentrates from
Incos operations in Canada and from the recovery, through
toll-refining, of materials containing platinum-group metals
supplied by unaffiliated customers.

In November 2001, the Company announced that it
was consolidating its Ontario Division, its Manitoba Division
and its United Kingdom operations into a new business unit to be
known as its Canadian and UK Operations. This new organization
has facilitated the sharing of knowledge and has helped to
optimize the use of certain of the Companys facilities and
resources.

The following table shows Incos total
production of finished nickel and copper from its primary metals
facilities for the five years ended December 31, 2003:

|       |  |                                       |         |      |  |      |         |      |  |      |         |  |  |  |         |  |  |  |         | 
|------ |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  |  | ------- |  |  |  | ------- | 
|       |  |                                      
|       |  | Finished Nickel and Copper Production
|       |  |                                      
|       |  | 2003                                  |         | 2002 |  | 2001 |         | 2000 |  | 1999
|       |  |                                       |         |      |  |      |         |      |  |     
|       |  |                                      
|       |  | (in tonnes)                          
|Nickel |  |                                       | 187,173 |      |  |      | 209,728 |      |  |      | 207,077 |  |  |  | 202,806 |  |  |  | 177,253 | 
|Copper |  |                                       | 91,134  |      |  |      | 111,787 |      |  |      | 116,255 |  |  |  | 114,397 |  |  |  | 116,260 | 

See Mining and Production 
General above for information regarding the Companys
expected nickel production for 2004.

Of the amounts reported in the table above as
finished nickel production, the following table shows the
amounts of such total finished nickel production from
nickel-in-matte produced by PT Inco for the five years ended
December 31, 2003:

|       |  |                                    |        |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        | 
|------ |  | ---------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ |  |  |  | ------ | 
|       |  |                                   
|       |  | Finished Nickel from PT Inco Matte
|       |  |                                   
|       |  | 2003                               |        | 2002 |  | 2001 |        | 2000 |  | 1999
|       |  |                                    |        |      |  |      |        |      |  |     
|       |  |                                   
|       |  | (in tonnes)                       
|Nickel |  |                                    | 65,704 |      |  |      | 61,692 |      |  |      | 61,856 |  |  |  | 58,356 |  |  |  | 43,615 | 

The Companys worldwide nickel processing
capacity, including capacity at its majority-owned subsidiaries,
is adequate to refine the production from its mines at current
rates of mine production. The Company also has contractual
nickel refining arrangements with nickel refiners in Asia in
which the Company has minority equity



---

|    |                
|--- | ---------------
|(5) | Inco trademark.

|    |                
|--- | ---------------
|(6) | Inco trademark.

25



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##### Table of Contents



interests. These include an arrangement with
Taiwan Nickel for the supply of intermediate products produced
by Inco for Taiwan Nickels refining operations, and a
joint venture, also involving the supply of intermediate
products produced by Inco, with Korea Nickel which, in turn,
produces UTILITY nickel. The other shareholders of Taiwan Nickel
are a number of Taiwanese investors and the other shareholders
of Korea Nickel are Korea Zinc Company, Ltd. (Korea
Zinc), a number of individuals associated with Korea Zinc
and entities associated with Pohang Iron and Steel Co., Ltd.


All production facilities at the Companys
operations in Ontario, Manitoba, Clydach and Acton are owned by
the Company and are located on property which Inco owns or with
respect to which it has contractual rights to acquire ownership.

Permission from the Ontario government is
required for the export of intermediate products derived from
Ontario ores. The Companys practice is to meet with
government officials prior to the expiration of each of the
required export licences to discuss relevant aspects of the
export procedure. In December 1995, the Ontario government
granted permission for the Company to export nickel oxide sinter
and nickel sulphide matte, as well as nickel sulphate residue,
to Clydach until December 31, 2005. During 2003, the
Company refined about 14 per cent of its primary nickel
production at its refinery in Clydach from intermediate products
derived from the Companys Ontario ores. The Ontario
government also granted permission for the Company to export its
semi-refined platinum-group metals concentrate to its Acton
refinery until December 31, 2005. The Company anticipates
that it will be granted permission to continue to export these
materials for additional years after the expiry of these current
permits. There is currently no restriction on the export of the
products of the Companys Thompson mines for treatment or
refining outside Canada. As discussed under Ore Reserves
and Mining Rights and Voiseys Bay Nickel
Company Limited  Negotiations with the Provincial
Government below, there will be certain restrictions or
limitations relating to the export of intermediate products from
the Province of Newfoundland and Labrador.






| |                                   
| | ----------------------------------
| | Ore Reserves and Mining
    Rights





| |             
| | ------------
| | Ore Reserves

The following tables show, as of the end of the
periods indicated, the Companys estimates of its
(i) proven ore reserves, (ii) probable ore reserves
and (iii) aggregate of proven and probable ore reserves at
its operating mines, non-operating mines or mines on standby,
undeveloped properties, development projects and mining areas at
its Ontario operations, Manitoba operations, Voiseys Bay
project in the Province of Newfoundland and Labrador, PT Inco in
Indonesia and at its Goro project in New Caledonia and the
estimated respective average nickel (Ni), copper (Cu),
cobalt (Co), platinum (Pt), palladium (Pd) and
gold (Au) metal grades, where significant, of each such
total amount expressed as a percentage of such total amount as
of the end of the periods

26



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##### Table of Contents



indicated. Ore reserve estimates referred to
under Exploration and Project Development below or
elsewhere in this Report are included in these tables.


Total Estimated Ore Reserves As of Year-End
2002

(in millions of tonnes (Mt) except as
indicated)(1)(2)(3)(7)


|                       |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|---------------------- |  | ----- | -------- | -- |  | --- | --- | --- |  | --- | ---- | ---------- |  | ---------- | ---- | ---------- |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- | 
|                       |  | Class |          | Mt |  | %Ni |     | %Cu |  | %Co |      | Pt (g/mt)* |  | Pd (g/mt)* |      | Au (g/mt)*
|                       |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |           
|ONTARIO OPERATIONS     |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|Operating Mines        |  |       | Proven   |    |  |     | 112 |     |  |     | 1.36 |            |  |            | 1.52 |            |  |  |      |  |  |  | 0.65 |  |  |  | 0.73 |  |  |  | 0.28 | 
|                       |  |       | Probable |    |  |     | 36  |     |  |     | 1.21 |            |  |            | 1.58 |            |  |  |      |  |  |  | 1.26 |  |  |  | 1.49 |  |  |  | 0.63 | 
|                       |  |       | Total    |    |  |     | 148 |     |  |     | 1.32 |            |  |            | 1.54 |            |  |  |      |  |  |  | 0.80 |  |  |  | 0.92 |  |  |  | 0.37 | 
|                      
|Non-Operating Mines    |  |       | Proven   |    |  |     | 1   |     |  |     | 1.60 |            |  |            | 0.69 |            |  |  |      |  |  |  | 0.10 |  |  |  | 0.10 |  |  |  | 0.03 | 
|                       |  |       | Probable |    |  |     | 38  |     |  |     | 1.07 |            |  |            | 0.92 |            |  |  |      |  |  |  | 0.55 |  |  |  | 0.55 |  |  |  | 0.21 | 
|                       |  |       | Total    |    |  |     | 39  |     |  |     | 1.08 |            |  |            | 0.92 |            |  |  |      |  |  |  | 0.54 |  |  |  | 0.54 |  |  |  | 0.21 | 
|                      
|Undeveloped Properties |  |       | Proven   |    |  |     | 0.3 |     |  |     | 1.39 |            |  |            | 0.84 |            |  |  |      |  |  |  | 0.10 |  |  |  | 0.10 |  |  |  | 0.03 | 
|                       |  |       | Probable |    |  |     | 5.7 |     |  |     | 1.47 |            |  |            | 0.57 |            |  |  |      |  |  |  | 0.22 |  |  |  | 0.52 |  |  |  | 0.12 | 
|                       |  |       | Total    |    |  |     | 6.0 |     |  |     | 1.47 |            |  |            | 0.58 |            |  |  |      |  |  |  | 0.22 |  |  |  | 0.50 |  |  |  | 0.11 | 
|                      
|Total                  |  |       | Proven   |    |  |     | 113 |     |  |     | 1.36 |            |  |            | 1.51 |            |  |  |      |  |  |  | 0.64 |  |  |  | 0.72 |  |  |  | 0.27 | 
|                       |  |       | Probable |    |  |     | 80  |     |  |     | 1.16 |            |  |            | 1.20 |            |  |  |      |  |  |  | 0.85 |  |  |  | 0.96 |  |  |  | 0.38 | 
|                       |  |       | Total    |    |  |     | 193 |     |  |     | 1.28 |            |  |            | 1.38 |            |  |  |      |  |  |  | 0.72 |  |  |  | 0.83 |  |  |  | 0.31 | 
|MANITOBA OPERATIONS    |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|Operating Mines        |  |       | Proven   |    |  |     | 22  |     |  |     | 2.14 |            |  |            | 0.14 |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|                       |  |       | Probable |    |  |     | 15  |     |  |     | 2.21 |            |  |            | 0.14 |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|                       |  |       | Total    |    |  |     | 37  |     |  |     | 2.17 |            |  |            | 0.14 |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|VOISEYS BAY PROJECT   |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|Development Property   |  |       | Proven   |    |  |     | 28  |     |  |     | 3.02 |            |  |            | 1.77 |            |  |  | 0.15 |  |  |  |      |  |  |  |      |  |  |  |      | 
|                       |  |       | Probable |    |  |     | 2   |     |  |     | 0.77 |            |  |            | 0.55 |            |  |  | 0.04 |  |  |  |      |  |  |  |      |  |  |  |      | 
|                       |  |       | Total    |    |  |     | 30  |     |  |     | 2.85 |            |  |            | 1.68 |            |  |  | 0.14 |  |  |  |      |  |  |  |      |  |  |  |      | 
|PT INCO                |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|Mining Areas           |  |       | Proven   |    |  |     | 51  |     |  |     | 1.71 |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|                       |  |       | Probable |    |  |     | 40  |     |  |     | 1.76 |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|                       |  |       | Total    |    |  |     | 91  |     |  |     | 1.73 |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|GORO PROJECT           |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|Development Property   |  |       | Proven   |    |  |     | 44  |     |  |     | 1.41 |            |  |            |      |            |  |  | 0.13 |  |  |  |      |  |  |  |      |  |  |  |      | 
|                       |  |       | Probable |    |  |     | 13  |     |  |     | 1.92 |            |  |            |      |            |  |  | 0.08 |  |  |  |      |  |  |  |      |  |  |  |      | 
|                       |  |       | Total    |    |  |     | 57  |     |  |     | 1.52 |            |  |            |      |            |  |  | 0.12 |  |  |  |      |  |  |  |      |  |  |  |      | 



---



|  |                          
|- | -------------------------
|* | in grams per tonne (g/mt)

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##### Table of Contents



Total Estimated Ore Reserves As of Year-End
2003

(in millions of tonnes (Mt) except as
indicated)(1)(2)(3)(7)


|                               |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|------------------------------ |  | ----- | -------- | -- |  | --- | --- | --- |  | --- | ---- | ---------- |  | ---------- | ---- | ---------- |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- | 
|                               |  | Class |          | Mt |  | %Ni |     | %Cu |  | %Co |      | Pt (g/mt)* |  | Pd (g/mt)* |      | Au (g/mt)*
|                               |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |           
|ONTARIO OPERATIONS(4)(6)       |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|Operating Mines                |  |       | Proven   |    |  |     | 90  |     |  |     | 1.42 |            |  |            | 166  |            |  |  |      |  |  |  | 0.75 |  |  |  | 0.83 |  |  |  | 0.29 | 
|                               |  |       | Probable |    |  |     | 52  |     |  |     | 1.16 |            |  |            | 1.42 |            |  |  |      |  |  |  | 1.08 |  |  |  | 1.18 |  |  |  | 0.45 | 
|                               |  |       | Total    |    |  |     | 142 |     |  |     | 1.33 |            |  |            | 1.57 |            |  |  |      |  |  |  | 0.87 |  |  |  | 0.96 |  |  |  | 0.35 | 
|                              
|Non-Operating Mines            |  |       | Proven   |    |  |     | 1   |     |  |     | 1.60 |            |  |            | 0.69 |            |  |  |      |  |  |  | 0.10 |  |  |  | 0.10 |  |  |  | 0.03 | 
|                               |  |       | Probable |    |  |     | 38  |     |  |     | 1.04 |            |  |            | 0.92 |            |  |  |      |  |  |  | 0.55 |  |  |  | 0.56 |  |  |  | 0.21 | 
|                               |  |       | Total    |    |  |     | 39  |     |  |     | 1.06 |            |  |            | 0.91 |            |  |  |      |  |  |  | 0.54 |  |  |  | 0.55 |  |  |  | 0.21 | 
|Undeveloped                    |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|Properties                     |  |       | Proven   |    |  |     | 1   |     |  |     | 1.09 |            |  |            | 0.50 |            |  |  |      |  |  |  | 0.10 |  |  |  | 0.10 |  |  |  | 0.03 | 
|                               |  |       | Probable |    |  |     | 5   |     |  |     | 0.50 |            |  |            | 0.60 |            |  |  |      |  |  |  | 0.25 |  |  |  | 0.59 |  |  |  | 0.14 | 
|                               |  |       | Total    |    |  |     | 6   |     |  |     | 0.47 |            |  |            | 0.60 |            |  |  |      |  |  |  | 0.24 |  |  |  | 0.56 |  |  |  | 0.13 | 
|                              
|Total                          |  |       | Proven   |    |  |     | 92  |     |  |     | 1.42 |            |  |            | 1.64 |            |  |  |      |  |  |  | 0.75 |  |  |  | 0.82 |  |  |  | 0.31 | 
|                               |  |       | Probable |    |  |     | 95  |     |  |     | 1.13 |            |  |            | 1.18 |            |  |  |      |  |  |  | 0.82 |  |  |  | 0.89 |  |  |  | 0.34 | 
|                               |  |       | Total    |    |  |     | 187 |     |  |     | 1.27 |            |  |            | 1.41 |            |  |  |      |  |  |  | 0.79 |  |  |  | 0.86 |  |  |  | 0.31 | 
|MANITOBA OPERATIONS(4)(6)      |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|Operating Mines                |  |       | Proven   |    |  |     | 20  |     |  |     | 2.25 |            |  |            | 0.15 |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|                               |  |       | Probable |    |  |     | 14  |     |  |     | 2.11 |            |  |            | 0.15 |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|                               |  |       | Total    |    |  |     | 34  |     |  |     | 2.19 |            |  |            | 0.15 |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|VOISEYS BAY
    PROJECT(4)(6) |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|Development Property           |  |       | Proven   |    |  |     | 28  |     |  |     | 3.02 |            |  |            | 1.77 |            |  |  | 0.15 |  |  |  |      |  |  |  |      |  |  |  |      | 
|                               |  |       | Probable |    |  |     | 2   |     |  |     | 0.77 |            |  |            | 0.55 |            |  |  | 0.04 |  |  |  |      |  |  |  |      |  |  |  |      | 
|                               |  |       | Total    |    |  |     | 30  |     |  |     | 2.85 |            |  |            | 1.68 |            |  |  | 0.14 |  |  |  |      |  |  |  |      |  |  |  |      | 
|PT INCO(5)(6)                  |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|Mining Areas                   |  |       | Proven   |    |  |     | 62  |     |  |     | 1.81 |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|                               |  |       | Probable |    |  |     | 45  |     |  |     | 1.80 |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|                               |  |       | Total    |    |  |     | 107 |     |  |     | 1.81 |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|GORO PROJECTS(5)(6)            |  |       |          |    |  |     |     |     |  |     |      |            |  |            |      |            |  |  |      |  |  |  |      |  |  |  |      |  |  |  |      | 
|Development Property           |  |       | Proven   |    |  |     | 44  |     |  |     | 1.41 |            |  |            |      |            |  |  | 0.13 |  |  |  |      |  |  |  |      |  |  |  |      | 
|                               |  |       | Probable |    |  |     | 13  |     |  |     | 1.92 |            |  |            |      |            |  |  | 0.08 |  |  |  |      |  |  |  |      |  |  |  |      | 
|                               |  |       | Total    |    |  |     | 57  |     |  |     | 1.52 |            |  |            |      |            |  |  | 0.12 |  |  |  |      |  |  |  |      |  |  |  |      | 



---



| |   |                          
| | - | -------------------------
| | * | In grams per tonne (g/mt)

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reserves represent, in accordance with applicable
    rules and regulations of the U.S. Securities and Exchange
    Commission (the SEC), including the definitions
    thereunder, that part of a mineral deposit which could be
    economically and legally extracted or produced at the time of
    the reserve determination. Proven reserves are reserves for
    which (i) the quantity is computed from dimensions revealed
    in outcrops, trenches, workings or drill holes; grade and/or
    quality are computed from the results of detailed sampling and
    (ii) the sites for inspection, sampling and measurement are
    spaced so closely and the geologic character is so well defined
    that size, shape, depth and mineral content of reserves are
    well-established. Probable reserves are reserves for which the
    quantity and grade and/or quality are computed from information
    similar to that used for proven reserves, but the sites for
    inspection, sampling, and measurement are farther apart or are
    otherwise less adequately spaced. The degree of assurance,
    although lower than that for proven reserves, is high enough to
    assume continuity between points of observation.
|(2) | The Company, in accordance with applicable
    Canadian securities regulatory requirements, also estimates its
    mineral reserves (as well as mineral resources) in compliance
    with the definitions under the CIM Standards on Mineral
    Resources and Reserves Definitions and Guidelines adopted by the
    CIM Council of the Canadian Institute of Mining, Metallurgy and
    Petroleum in August 2000 (the CIM Guidelines). If
    the reserve numbers above estimated as of year-end 2003 and 2002
    were prepared in accordance with such definitions for
    mineral reserve, probable mineral
    reserve and proven mineral reserve in the CIM
    Guidelines, there would be no substantive differences in such
    numbers from the total numbers for proven and probable ore
    reserves in the tables above or as noted in the paragraphs
    immediately following the tables or with respect to the other
    reserve estimates set forth elsewhere in this Report. For the
    purposes of such                                                                                                                                                                                                            

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Guidelines, the Ontario and Manitoba
    operations ore reserves at their operating mines are
    estimated based on, among other factors, operating costs, and
    the ore reserves estimates at such operations
    non-operating mines are based on, among other factors, mining
    costs derived from certain mining studies. Total reserve
    estimates are based on a number of assumptions such as mining
    methods, production and other costs, metal recovery rates and
    dilution factors. Such costs also include amortization and
    depreciation; selling, general and administration charges;
    marketing costs; and charges for non-operating or stand-by
    mines. Projections of metal prices and certain exchange rates
    are also used in preparing reserve estimates. For 2003, revenue
    assumptions were based upon certain metal prices used in
    preparing these estimates as follows: nickel at $3.20 per
    pound (London Metal Exchange (LME) cash nickel
    price) with adjustments made for a volatility premium (where the
    volatility premium represents an estimate of the net price
    change taking into account the nickel price volatility and
    probability of exploiting additional ore reserves contained in
    our various orebodies) and for special product premiums or
    discounts; copper at $0.90 per pound; cobalt at
    $7.00 per pound; platinum at $420 per troy ounce;
    palladium at $250 per troy ounce; and gold at $275 per
    troy ounce; the U.S. dollar-Canadian dollar exchange rate
    used was $1.00 to Cdn.$1.52 and a exchange rate for the
    Indonesian rupiah (Rp) of $1.00 to Rp 9,500. In 2002,
    revenue assumptions were based upon the following metals prices:
    for nickel: $3.30 per pound LME cash nickel price for the
    Ontario and Manitoba operations and, based upon the timing of
    these estimates, a $3.20 LME cash nickel price was used for the
    Goro and Voiseys Bay projects, with adjustments made for
    special product premiums realized by the Ontario and Manitoba
    operations; copper: $0.90 per pound; cobalt: $7.00 per
    pound; platinum: $420 per troy ounce; palladium:
    $250 per troy ounce; and gold: $275 per troy ounce;
    and a U.S. dollar-Canadian dollar exchange rate of
    $1.00 = $1.52; the revenue assumptions utilized for 2002
    varied for PT Inco due to the timing of the assessments and the
    evaluations. For PT Inco, the breakeven cut-off grade was based
    on a metal price of $3.20 (LME cash nickel price) for its nickel
    in matte, a U.S. dollar-Canadian dollar exchange rate of
    $1.00 = $1.43 and a U.S. dollar-Indonesian rupiah
    exchange rate of $1.00 = 9,500 Rp, taking into account when
    this cut-off grade was developed. The Company, in preparing its
    ore reserve estimates, takes into account recent trends in metal
    prices and exchange rates in developing the metal prices and
    exchange rates it uses for these purposes.
|(3) | In accordance with applicable Canadian securities
    regulatory requirements, including National Instrument 43-101,
    Standards of Disclosure for Mineral Projects,
    Mr. Robert A. Horn, who served as Vice-President,
    Exploration from 1995 until mid-November 2003 and continued as a
    full-time employee until the end of January 2004 and currently
    as a part-time employee serves as an executive advisor to the
    Companys Executive Vice-President, Technical Services, has
    as a qualified person within the meaning of such National
    Instrument (which means generally an individual with relevant
    experience as an engineer or geoscientist who is also a member
    in good standing of a recognized engineering or similar
    professional association) indirectly supervised the preparation
    of the ore reserves estimates and other information set forth in
    the tables and notes thereto for the Goro project. Dr.
    Lawrence B. Cochrane, Director of Mines Exploration with
    the Company, has as a qualified person within the meaning of
    such National Instrument indirectly supervised the preparation
    of the ore reserve estimates for the Ontario and Manitoba
    operations, the Voiseys Bay project and PT Inco, and
    Mr. Robert C. Osborne, Consulting Geologist, Laterites
    with the Company, has as such a qualified person also indirectly
    supervised the preparation of the ore reserve estimates for PT
    Inco. Mr. Horn, Dr. Cochrane and Mr. Osborne
    have, in accordance with the requirements of such National
    Instrument, conducted either directly by themselves or
    indirectly through employees of the Company reporting directly
    or indirectly to them a comprehensive review and confirmation of
    the application of the detailed procedures, systems and
    processes the Company has developed and implemented for the
    purpose of verifying such data. Mr. Horn,
    Dr. Cochrane, Mr. Osborne and the staff of the Company
    involved in this process also periodically check the adequacy of
    such procedures, systems and processes which are intended to
    provide sufficient verification of such data based upon on
    recognized sampling, analytical testing, modeling and other
    procedures in the mining industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(4) | The ore reserve estimates for the Ontario and
    Manitoba operations are of in-place material after adjustments
    for mining dilution and mining recovery. No adjustments to these
    estimates have been made for metal losses due to processing
    (beneficiation, smelting and refining). For the Companys
    Ontario operations, the average metal recoveries after
    processing in 2003 are as follows: nickel (Ni) 
    74.5%, copper (Cu)  89.4%, platinum (Pt) 
    69.5%, palladium (Pd)  69.7% and gold
    (Au)  62.9%. For the Companys Manitoba
    operations, the average metal recoveries after processing in
    2003 are as follows: nickel  86.1%,
    copper  79.5% and cobalt  34.6%. The metal
    recoveries for each operating mine, non-operating mine, and
    undeveloped property vary depending on the metal grades and
    mineralogy for each mine or undeveloped property. The estimated
    ore reserves include factors for dilution and ore losses due to
    mining. The ore reserve estimates for the Voiseys Bay
    project are of in-place material after adjustments for mining
    dilution and losses due to mining recovery. No adjustments have
    been made to the ore reserve estimates for metal losses due to
    processing (beneficiation, smelting and refining). Overall
    processing recoveries for the Voiseys Bay project are
    expected to be 82% for nickel, 94% for copper, and 39% for
    cobalt. The metal recoveries from beneficiation were determined
    from extensive pilot plant tests. Smelting and refinery
    recoveries are based on actual recoveries at the Companys
    Ontario and Manitoba operations given that the Voiseys Bay
    nickel-containing concentrates planned to be produced over the
    2006-2011 period are to be processed at these operations. The
    realized metal recoveries in each zone may vary depending on the
    metal grades and the mineralogy of the ore in each zone.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(5) | The ore reserve estimates for PT Inco represent
    the product from PT Incos dryer kilns (Dry Kiln Product).
    The estimated ore reserves at PT Inco include factors for
    dilution and ore losses due to mining and screening recovery
    during ore preparation. The estimated ore reserves do not
    include nickel losses due to smelting. The average nickel
    recovery after processing used for PT Incos 2003 ore
    reserve estimate is 90.0%. 
     For the Goro project, the ore reserve estimates include factors
    for dilution due to mining and for ore losses due to mining
    recovery and screening recovery during feed preparation. The ore
    reserve is estimated using a screened fraction recovered of
    -50mm. The ore reserve estimates do not include the nickel or
    cobalt losses due to processing. The planned processing
    recoveries are anticipated to be 92.2% for nickel and 90.8% for
    cobalt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(6) | At the Companys Ontario operations, the
    drill-spacing for the estimated ore reserves classified as
    proven ranges from 30 meters by 46 meters
    to 15 meters by 23 meters, averaging 23 meters by
    34 meters. The drill-spacing for the estimated ore reserves
    classified as probable ranges from 61 meters by
    91 meters to 30 meters by 61 meters, averaging
    46 meters by 76 meters. The classifications are also
    dependent on the mining method and mining selectivity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | At the Companys Manitoba operations, the
    drill-spacing for the estimated ore reserves classified as
    proven ranges from 15 meters by 18 meters
    to 12 meters by 12 meters, averaging 14 meters by
    15 meters. The drill-spacing for the estimated ore reserves
    classified as probable ranges from 30 meters by
    30 meters to 61 meters by 61 meters, averaging
    45 meters by 45 meters. The classifications are also
    dependent on the mining method and mining selectivity.
|    | For the Voiseys Bay project, the
    drill-spacing for the ore estimated reserves classified as
    proven averages 50 meters by 25 meters.
    The drill-spacing for the estimated ore reserves classified as
    probable averages 50 meters by 50 meters.                                                                                                                                                                                                                                          
|    | For PT Inco, the drill-spacing for the estimated
    ore reserves classified as proven ranges from
    100 meters by 100 meters to 50 meters by
    50 meters, averaging 75 meters by 75 meters
    whereas the drill-spacing for the estimated ore reserves
    classified as probable ranges from 200 meters
    by 200 meters to 100 meters by 100 meters,
    averaging 150 meters by 150 meters.                                                                                                  
|    | For the Goro project, the average drill-spacing
    for the estimated ore reserves classified as proven
    is 100 meters by 100 meters and 100 by 200 meters
    for the estimated ore reserves classified as
    probable.                                                                                                                                                                                                                                                                           
|(7) | All estimated proven and probable ore reserves
    referred to in this Report, including the estimates referred to
    under Exploration and Project Development below, are
    included in the tables above.                                                                                                                                                                                                                                                                                            

The estimated ore reserves at the Companys
Ontario operations for 2003 decreased by 5.0 million tonnes
primarily due to mining removal of 6.2 million tonnes
grading 1.39 per cent nickel and 1.53 per cent copper.
The estimated ore reserves at one of the Ontario
operations undeveloped properties, the WD 16 property
(0.5 million tonnes grading 1.23 per cent nickel and
0.16 per cent copper), was removed from the Ontario
operations estimated ore reserves in 2003 due to the
extended time required to obtain the necessary mining permits
for this property. These decreases were partially offset by an
increase in estimated ore reserves for the Ontario operations
for 2003 of 2.5 million tonnes grading 1.48 per cent
nickel and 2.75 per cent copper from exploration.

In 2003, estimated proven and probable ore
reserves at the Manitoba operations were reduced by
3 million tonnes from year-end 2002 estimates. In addition
to mining removal (2.0 million tonnes grading 2.09 per
cent nickel and 0.13 per cent copper), the re-evaluation of
mining plans at the Manitoba operations due to an increase in
mining costs resulted in a decrease of 2.8 million tonnes
from year-end 2002 estimates. These reductions were partially
offset by an increase of 1.9 million tonnes of estimated
proven and probable ore reserves from exploration at the
Thompson and Birchtree mines.

At PT Inco, estimated probable ore reserves were
increased by 16 million tonnes as a result of ongoing
exploration at the Petea mining area. The nickel grade of the
estimated ore reserves at PT Inco increased from 1.73 per
cent at year-end 2002 to 1.81 per cent at year-end 2003 as
a result of reductions in mining dilution and the application of
more selective mining methods. In 2003, mining removal at PT
Inco totaled 3.9 million tonnes grading 1.9 per cent
nickel.

At the Companys Ontario and Manitoba
operations, ore reserves are estimated based on a breakeven
calculation where the estimated value of the ore in the ground
must be equal to, or greater than, the mining costs (or cut-off
value). The ore value is determined by deducting from the
calculation of gross revenues certain expenses and processing
costs. All costs are based upon Incos applicable annual
operating plan. Processing costs include operating, depreciation
and sustaining capital costs and are updated annually to reflect
the assumptions for such costs included in Incos current
annual or longer term (usually five-year) operating plans. Plant
overhead costs are also updated annually with plant throughput
assumed to remain constant. Corporate costs include selling,
general and administration costs, charges for stand-by mines and
demolition expenses. Mining costs include operating and mine
overhead, capital, transportation and amortization and
depreciation. For the Companys Ontario and Manitoba
operations, metal recoveries are calculated based on process
plant recoveries developed as part of our annual operating plans
and are updated annually. Cut-off values for operating purposes
may be adjusted depending on a number of factors, principally
plant performance, profitability targets and/or short-term metal
prices.

Block modeling and geostatistical interpolation
methods are used to derive the ore reserve estimates for over
90 per cent of the ore reserves at Ontario. Conventional
(polygonal) methods are used primarily to estimate the ore
reserves remaining in pillars for secondary mining assessments.
At the Companys Manitoba operations, block models are used
and geostatistical interpolation methods are used at the
Manitoba Operations Birchtree mine and portions of the
Thompson mine. Conventional estimation methods are used for
about 50 per cent of the ore reserve estimates at the
Manitoba operations. The mining methods used are generally
non-selective and the internal dilution is included in the
mining blocks evaluated in developing the estimates.

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For the block models, an estimation method, which
we believe represents an appropriate geostatistical approach for
the data, is selected and technical checks are incorporated into
the modeling process. Back analysis studies of mined out areas
are completed to verify the appropriateness of polygonal and
geostatistical estimation methods and the block models are
verified internally. External auditors have been used to
critique our geostatistical techniques utilized. Standard
procedures are used for the polygonal estimation techniques.
Sections and plans employing standardized grading and
interpretation procedures are used to select the mining method
and assign mining lines. Mineral tonnages and metal grades are
then determined and appropriate mineability and dilution rates
are applied. As noted above, mining costs represent the cut-off
values used to selectively report what mining blocks would be
included in our ore reserve estimates.

For the Voiseys Bay project, the geological
interpretation of the Voiseys Bay Ovoid zone has been
based on the modelling of the troctolite unit hosting the
mineral. Within this model, two domains of massive sulphide and
disseminated mineralization were further defined. The block
dimensions used in the block model are 10m x 10m x 5m
vertical. Geotechnical data derived from core holes drilled in
the pit walls were used to design the open pit to mine this
zone. Economic evaluations are based on metal recoveries
determined from extensive metallurgical testing and operating
costs estimated in the Voiseys Bay projects March
2003 feasibility study.

Due to the different economic contributions from
each metal, block net smelter royalty (BNSR) values have
been used instead of a single metal cut-off grade for the open
pit definition, production planning and ore reserve
determination. The BNSR calculations assume constant concentrate
grades with which to calculate smelting, refining and freight
charges. Charges in the BNSR calculation, in addition to
smelting, refining, and concentrate shipping charges, include a
3 per cent royalty payment to Archean Resources Ltd., which
in 2003 transferred this royalty to a limited partnership it
created to hold such royalty interest as discussed under
Mining and Other Rights below, and an assumed
technical/management fee payable to Inco Limited. A life-of-mine
schedule using a variable BNSR cut-off approach was also
developed. Blocks valued greater than the BNSR cut-off in the
production schedule were tabulated as ore. The cutoff value
corresponds to the expected milling costs plus site general and
administration costs. All blocks with BNSR values less than the
cut-off were considered as waste. There are no plans for a
low-grade stockpile for the Voiseys Bay project, and,
accordingly, no part of the estimated ore reserve is considered
stockpile ore. The BNSR cut-off used in the last six years in
the projects estimated mine life corresponds to the mill
breakeven cut-off.

For the Goro project, the ore reserves were
estimated using block modelling based on a 30m by 30m by 1m
block size. The nickel and cobalt grades, the chemical
components and screen recoveries were interpolated for each
block for each of the laterite layers using recognized mining
industry methods. The specific gravity, moisture content and
screen size recoveries of the laterite layers were determined
based on data collected during geological and geotechnical
drilling campaigns. Grade simulation models, developed from
close-spaced drilling, were used to simulate variability in the
layers thickness and chemistry, that are expected to be
encountered during mining, to estimate the ore loss due to
mining and mining dilution. A 1.20 per cent nickel cut-off
grade was used to estimate the ore reserves. The cut-off grade
provides a plant feed that meets the required chemistry of the
blended material delivered to the process plant to provide the
planned nickel and cobalt production. The 1.20 per cent nickel
cut-off grade was applied in the limonitic layer only and all
material located below that cut-off horizon are planned to be
mined in bulk, without mining selectivity applied, until bedrock
is reached.

The cut-off grades used to estimate ore reserves
at PT Inco are also based on a break-even calculation. A
break-even grade is used rather than a break-even value since
nickel is the only metal produced by PT Inco. The estimation of
the break-even grade is based on a certain assumed nickel prices
less the discount for the nickel in matte product produced by PT
Inco (representing the selling price received by PT Inco for its
nickel in matte product equivalent to a percentage of the London
Metal Exchange (LME) cash nickel price). Costs are based on
annual plan operating costs (including selling, general and
administration costs), and current depreciation and amortisation
expenses (adjusted for any future changes). In the computation
of the break-even grades for 2003, operating and fixed costs are
based on PT Incos 2004 annual budget plan, after
normalising certain costs for long-term usage and removing
certain unusual costs for one-time events (additional
pre-stripping, delineation drilling and equipment rentals) and
an adjustment for oil prices to a ten-year average. PT
Incos process plant nickel recovery factor is also based
on its annual operating plan and is adjusted each year. For the
estimation of ore reserves for PT Incos three mining
areas, the Sorowako East Block, Sorowako West Block and the Petea

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areas, the break-even grades take into
consideration the operating costs at each location. The cut-off
grade used for the Sorowako East Block is
1.45 per cent nickel, the Petea area is
1.50 per cent nickel and for the Sorowako West Block
is 1.55 per cent nickel. Given the nature of PT
Incos laterite deposits and how they are mined, PT Inco
does not have specific operating mines but rather has mining
areas. PT Inco from time to time has, however, referred to the
Sorowako West Block and East Block areas (shown on the map below
under P.T. International Nickel Indonesia Tbk)
collectively as its Sorowako mine.


PT Inco may use different cut-off grades for
purposes of its short-term operations. Cut-off grades for
short-term operating purposes are adjusted depending on a number
of factors, principally plant performance, profitability targets
and/or short-term nickel prices.

The ore reserves for PT Inco are estimated using
block modelling techniques and geostatistical interpolation
methods. Standard block sizes are used with different parameters
applied to each deposit and in each of the limonite and
saprolite layers. Mining volumes were estimated using a minimum
ore thickness of two meters and material below cut-off
grade was classified as internal waste if it was equal to or
less than two meters thick. A minimum of 25 meters by
25 meters lateral extent criteria was used to classify the
ore. The mineral volumes were converted to tonnages using
appropriate wet tonnage factors. Screening recovery factors
based on actual production are applied to convert the run of
mine product to equivalent DKP. Mining recovery and dilution was
included in the estimation of the reportable reserves.

Over the past three years, the key processes for
developing the Companys ore reserve estimates have been
enhanced to include more formalized senior management review and
approval of such processes and the preparation of such
estimates. These processes involve key technical personnel at
each of the principal operating units or locations, the
Companys corporate technical group, including the
Companys corporate exploration personnel, as well as
senior managements involvement and have been enhanced as
part of the objective of recognizing ore reserve estimating as a
core business process. In addition to internal audits of the
processes utilized and the estimates themselves, we have also
retained external auditing firms to review such processes and
estimates, including the ore reserve estimates for the
Voiseys Bay project.




Mining and Other
Rights

The following discussion reflects a summary of
the property rights, mining rights, licences, leases or other
concessionary rights to mine for or extract metals and other
associated minerals from the areas that the Company currently
mines or expects to mine as part of its long-term mine plans in
Canada, Indonesia and New Caledonia. With respect to those
properties which are not currently owned but are subject to
leases or licenses with finite terms that are not perpetual or
cannot be automatically renewed or extended and on which
estimated ore reserves are located and/or are covered by the
Companys current long-term mine plans, the Company
currently believes that it will be able to obtain renewals or
extensions of such leases or licenses, if required as part of
its long-term mine plans on a timely basis.

Ontario
Operations

All operating mines, non-operating mines and
undeveloped properties which contain estimated proven and
probable ore reserves for the Companys Ontario operations
are on lands owned by Inco, with the exception of a portion of
the Copper Cliff South mine (known as Kelly Lake) and a portion
of the Victor non-operating mine. These portions of the Copper
Cliff South and Victor mines are located on lands with respect
to which Inco currently holds a license of occupation. Inco has
applied for a 21-year lease for each of these two areas and
believes that renewals of these leases will be obtained on a
timely basis.

In Ontario, the Company also holds mining rights,
surface rights, licenses of occupation and mining claims granted
to it by the Province of Ontario. Mining rights are rights to
exploit and extract minerals on, in or under the land, and
surface rights are rights to use the surface of the land. These
rights remain in effect so long as Inco owns the land to which
these rights apply. Inco also owns a combination of mining and
surface rights covering land leased from the Province of
Ontario. These leased lands, which include a combination of
mining and surface rights, are leased for either 10 or
21 years. Annual rentals are paid to the Province to keep
the leases in good standing. One of the 21-year leases expired
in November 2003 and the Company applied for a 21-year renewal

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term and currently expects to receive the renewal
in late March 2004. Three of the 10-year leases held are up for
renewal in late March 2004. The next lease that comes up for
renewal is in 2008. Inco currently holds 165 licenses of
occupation for mining, hydro electric installations and various
other industrial purposes in Ontario. These licenses of
occupation allow Inco to use the land in the manner specified in
each license, including the right to dig, excavate and remove
ores and minerals from and under the land. Inco currently also
has a number of mining claims in Ontario. Mining claims
represent rights to explore the land covered by the claim. In
early March 2001, a party purported to stake mining claims and
then initiated an administrative appeal in the Province of
Ontario effectively contesting the validity of a licence of
occupation originally granted to the Company more than
50 years ago covering a portion of the Companys Kelly
Lake deposit which was identified in 1997. The actions taken by
this party alleged that the Companys rights under the
licence had been lost because the Company had not made timely
payments in accordance with the then applicable requirements for
the periodic payment of the rent required to be paid to the
province to maintain the licence. All of the appeals initiated
by this party contesting the license were dismissed during 2001
and 2002. As a result of the dismissal of the appeals and the
enactment of new legislation in Ontario in 2002, the Company
does not anticipate any future challenges to the validity of
such licences on the grounds alleged by this party.


Manitoba
Operations

Incos landholdings or mining rights in
Manitoba consist of order-in-council leases (OIC
Leases), mineral leases and mining claims. OIC Leases were
negotiated as part of an agreement between Inco and the Province
of Manitoba entered into in 1956 covering the development of the
Thompson, Manitoba nickel deposits by the Company. OIC Leases
entitle Inco to explore for, and mine, all minerals in the
subsurface (except hydrocarbons, industrial minerals and
surficial deposits that are not incidental to the mining,
milling, smelting and refining processes). OIC Leases also
provide Inco with the right to erect buildings and structures
necessary for its operations and provide for a right of access
over and upon the lands. OIC Leases provide for an initial
21-year term and two subsequent guaranteed renewals of
21 years each, for a total guaranteed lease period of
63 years. Subsequent lease renewals beyond the three
21 year terms can be granted at the discretion of the
Province of Manitoba. OIC Leases were initially surveyed and
made effective over a six year period over the 1957 to 1962
period. All of the current OIC Leases remain in effect through
the 2020  2024 period except certain leases where the
current second guaranteed 21-year term expires in September
2004. All third 21-year guaranteed renewals of the OIC Leases
have been granted except for one set of OIC Leases that, as
indicated above, are due for the third 21-year guaranteed term
renewal once the second 21-year guaranteed renewal term expires
in September 2004. All of the OIC Leases that cover the current
area of the Thompson mine were renewed in 2001 for 21-year
terms. The eastern and depth extensions of the Thompson mine are
covered by OIC Leases that are subject to a guaranteed 21-year
renewal of such leases in September 2004. Mineral leases are
21-year leases that are renewable at the discretion of the
Province. Inco holds seven mineral leases in the Thompson,
Manitoba nickel belt. The mineral leases, which conveys to the
lessee the exclusive right to the minerals (other than quarry
minerals) that occur on or under the land covered by the lease
and access rights to erect buildings and structures (including
shafts) to mine within the limits of the lease, remain in effect
until April 1, 2013. Inco also holds mining claims, a right
issued by the Province of Manitoba under provincial legislation
which conveys to the holder the exclusive right to the minerals
(other than quarry minerals) that occur on or under the land
covered by the claim and access rights to explore for and
develop minerals owned by the Province. A mining claim does not,
however, entitle the holder to extract minerals from the land
covered by the claim. In order to extract minerals from the land
covered by a mining claim, the holder must obtain a mineral
lease from the Province of Manitoba.

All of the Manitoba operations operating
mines and all the mineral rights for all mines which contain
estimated proven and probable ore reserves are on properties
covered by OIC Leases. The Manitoba operations Thompson
mine is located on land covered by an OIC Lease that is due for
renewal in 2022. Since this renewal would be beyond the three
21-year guaranteed renewals, the renewal can be obtained prior
to this Leases current expiration date. The eastern and
depth extensions of the Thompson mine are covered by OIC Leases
that are due for renewal in September 2004. As discussed above,
under the provisions of the original agreement with the Manitoba
Government, the renewal of these OIC Leases is guaranteed for a
third 21 year term. The Manitoba operations Birchtree
mine is located on land covered by both OIC Leases and three
mineral leases. The mineral

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leases are in good standing until April 1,
2013. We currently believe that the renewals of these leases
will be granted when they expire.


Voiseys
Bay Project

The Voiseys Bay project company, VBNC,
holds mineral claims (which have been grouped into mineral
licences), a mining lease and surface rights in the Province of
Newfoundland and Labrador. A mineral claim (generally covering a
500 meter by 500 meter parcel of land), issued by the Province
of Newfoundland and Labrador under provincial legislation,
entitles its holder the exclusive right to explore for minerals
in, on or under the area of land described in the licence, and
obligates its holder to conduct a minimum amount of assessment
work (measured by the amount of money spent) on the land covered
by the license. Up to 256 mineral claims can be grouped
together into one mineral licence. Grouping mineral claims into
a single mineral license allows the holder to better manage the
assessment work required to be done on the land that is the
subject of the claims. Mineral claims and mineral licences are
issued for a period of five years and may be extended for three
additional five-year renewal periods, for a total of twenty
years. A mineral licence does not entitle its holder to extract
any minerals from the land described in the licence. None of the
Voiseys Bay projects current estimated ore reserves
are located on lands covered by a mineral claim or licence.

In order to extract minerals from the land
covered by a mineral licence, the holder of a mineral licence
must obtain a mining lease issued by the province under
provincial legislation for the land covered by such mineral
licence. VBNC obtained a mining lease, effective
September 30, 2002, for a period of 25 years which
gives VBNC the exclusive right to extract minerals and carry out
mineral exploration, mining operations or mining processing and
development in, on or under the lands, or part of the lands so
long as VBNC and Inco continue to meet the terms and conditions
of a development agreement made as of September 30, 2002
between VBNC, Inco and Her Majesty the Queen in right of
Newfoundland and Labrador. This mining lease can be renewed for
further 10-year terms so long as VBNC has been in compliance
with the terms of the lease and has applied for such renewal at
least three months prior to the expiration of the then current
lease. Under the terms of the mining lease, production is not to
exceed on average 2.2 million tonnes of ore annually
for the first 10 years of mining operations and on
average 5.5 million tonnes of ore annually thereafter.
The current areas to be mined as part of the Voiseys Bay
project and all of the estimated proven and probable ore
reserves for the Voiseys Bay project are held under this
mining lease. We are not aware of any information or other
factors at this time which would indicate that we could not
reach agreement with the Province on a new mining lease or an
extension when the current mining lease expires in September
2027. In addition, as a corollary to the mining lease, VBNC
received a surface lease entitling it to use certain lands
necessary for its mining operations. Like the mining lease, the
surface lease was effective September 30, 2002 for a period
of 25 years, and may be renewed for further 10-year terms.

VBNC also holds nine mineral licences, all of
which expire over the March  November 2014 period,
covering the main claim block of the Voiseys Bay project.
These mineral licences have not been legally surveyed.
Geographic coordinates define their locations. To date,
sufficient assessment work has been completed to maintain these
mineral licences at least until 2008 so long as the required
renewal fees (currently being approximately Cdn. $100,000
and payable every five years, subject to increases in such fees
based on subsequent renewals) are paid. Additional assessment
work will be required to hold the mineral licences in good
standing through 2014.

Pursuant to the terms of an option agreement
originally entered into in 1993 (the Option
Agreement), Diamond Fields Resources Inc. (Diamond
Fields) acquired, upon the exercise of the option
thereunder, all of the mineral claims of Archean Resources Ltd.
(Archean) in Labrador and Archean was granted a
royalty, payable quarterly, equal to three per cent of net
smelter returns from mining production from VBNCs Labrador
properties, including the Voiseys Bay deposit, (the
Royalty) and a three per cent gross royalty (also
payable quarterly) on the gross value of raw diamonds and/or
gemstones recovered from these properties. The Option Agreement
was assigned to VBNC by Diamond Fields in 1995. The royalty is
secured by a mortgage on VBNCs Labrador properties in the
maximum aggregate principal amount of $100 million. The
mortgage is expressly subordinated to any mine development
financing that might be obtained in the future. In 2003 Archean
transferred this royalty to a limited partnership currently
controlled by Archeans principal shareholders.

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The Voiseys Bay deposit is within a
geographical area that has been the subject of land claims
negotiations between certain aboriginal groups and the
Governments of Canada and the Province of Newfoundland and
Labrador. Aboriginal groups asserting land claims in the area
include the Labrador Inuit Association (the LIA) and
Innu Nation. For further information, see Voiseys
Bay Nickel Company Limited  Negotiations with
Aboriginal Groups below.

Goro
Project

The Goro project company, Goro Nickel, currently
holds 69 nickel, cobalt and certain other mining concessions and
approximately 26 surface rights covering
19,500 hectares, all in the south province (Province
Sud) of New Caledonia. Goro Nickel also holds an additional
12 mining concessions outside the Goro project area in New
Caledonia in a region called Tiebaghi. Of the
69 concessions held by Goro Nickel, the Goro project covers
6,042 hectares within seven mining concessions, of which
four are perpetual in term and three are renewable prior to
their expiry dates (in 2016 and 2051). Goro Nickel has the right
to renew these three renewable concessions for an additional
25-year period when their initial terms expire. Concessions
generally represent long term permits (having a term up to
perpetuity) granted for mining large deposits which entitle the
holder the exclusive right to exploit, extract and mine. A
concession applies to one or several minerals defined by the
granting decision along with its geographical location. The
granting of a concession is based on the delineation of an
exploitable orebody made during exploration activities conducted
pursuant to permits called permis de
recherches or permis
dexploitation. Surface rights can be granted
independently of mineral rights. Goro Nickel holds surface
rights, known as occupation des sols, which
are rights to use surfaces on or outside mining permits for
mining-related activities. All of the estimated proven and
probable ore reserves for the Goro project are within the mining
and surface rights held as concessions. As discussed above, four
of the concessions are perpetual and the other three concessions
have expiry dates between 2016 and 2051.

PT
Inco

Under the original Contract of Work or
concessionary agreement between the Republic of Indonesia and
Inco entered into in 1968, and the agreement on modifying and
extending that Contract of Work entered into in January 1996
which sets forth certain provisions which will apply once the
terms of the original Contract of Work expires on March 1,
2008 and through December 28, 2025, PT Inco, as the sole
contractor of the Government of Indonesia in the areas covered
by the Contract of Work, has been granted exclusive rights in
these specified areas on the Island of Sulawesi to mine,
process, store, transport and sell all nickel and
nickel-containing minerals in any form and all minerals, except
for radioactive materials) found in association with nickel in
the areas. The Contract of Work also grants PT Inco all
necessary licenses and permits to conduct its operations,
including certain expansions of its operations, as provided for
in the Contract of Work. All of PT Incos mining areas
currently containing estimated proven and probable ore reserves
are within PT Incos Contract of Work. Under the terms of
the agreement of modification and extension of
PT Incos original Contract of Work entered into in
1996, the Government of Indonesia has agreed to give sympathetic
consideration to a further renewal or extension of the Contract
of Work, upon the request of PT Inco based upon one or more
developments, including a proposal to make a substantial new
investment in PT Inco, or the demonstration by PT Inco
of the positive economic and other benefits to Indonesia
provided by PT Inco. We are not aware of any information or
other factors at this time that would indicate that we would not
be able to reach agreement on a further extension of
PT Incos Contract of Work before it expires at the
end of 2025.






| |                                          
| | -----------------------------------------
| | PT International Nickel
    Indonesia Tbk





| |        
| | -------
| | General

In early March 2004, Inco acquired from an
existing shareholder in PT Inco approximately
5.2 million shares in PT Inco held by this
shareholder. As a result of this acquisition, Incos
ownership of the equity of PT Inco increased from
59 per cent to 61 per cent. Sumitomo Metal Mining Co.,
Ltd. (SMM) holds slightly more than 20 per cent
and public shareholders hold a total equity interest of slightly
more than 18 per cent. PT Incos shares are
traded on the Jakarta Stock Exchange. The Companys
investment at book value of PT Inco was approximately
$364 million at December 31, 2003, the same as at
December 31, 2002 and 2001. At

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December 31, 2003 PT Inco had
outstanding indebtedness to third party lenders totaling
$192 million, compared with $269 million at year-end
2002 and $292 million at year-end 2001. This indebtedness
was incurred primarily to finance the expansion project referred
to below under Contract of Work Extension and Expansion of
Facilities.


In view of its remote location,
PT Incos production facilities are almost completely
self-contained. They consist of an open-cast laterite mine, a
processing plant with four electric furnace smelting lines
(including a fourth line constructed as part of the PT Inco
expansion project referred to below), thermal and hydroelectric
power generating facilities and ancillary infrastructure,
including a townsite, roads, an airport and port facilities.

Since 1998, Indonesia has been experiencing
economic and political turmoil, some of which have been
compounded by a downturn in the global economy. Indonesias
return to economic and political stability will be dependent to
a large extent on the effectiveness of measures taken by the
democratically elected Government of Indonesia to restore
business and popular confidence, decisions of international
financial institutions, including the World Bank and the
International Monetary Fund, regarding the availability of
financing to Indonesia and companies operating in Indonesia,
global economic conditions, and a number of other factors,
including regulatory and political developments within
Indonesia, which are beyond the Companys control or
ability to predict.

In the Indonesian mining sector, mining companies
have been facing several challenges stemming from the problems
being experienced by Indonesia. These challenges include
regulatory uncertainty under regional autonomy legislation which
has sought to transfer governmental power in a number of areas,
including taxation and mining regulations, from the central
government to regional governments; overlapping and unclear tax
and environmental legislation enacted by central, provincial and
local government authorities; weakness in the banking sector;
illegal mining activities; increasingly militant actions of
non-governmental organizations and labour unions; and continued
disputes between mining companies and local communities who are
making increasing demands on mining companies operating in their
communities. These challenges may, in time, affect the
Companys operations and have, to the extent possible, been
taken into account by PT Incos management in
evaluating PT Incos current and future activities in
Indonesia.

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The map below indicates the mining areas, the
East Block, the West Block and the Petea areas, where
PT Incos estimated proven and probable ore reserves
were located for 2002 and 2003 as well as the location of
PT Incos process plant, hydroelectric facilities and
the boundary of the other properties (referred to as Other
Concessions in the map) contained within
PT Incos Contract of Work containing additional
mineralized nickel laterite.

(MAP OF MINING AREAS)






| |                                                                             
| | ----------------------------------------------------------------------------
| | Contract of Work Extension and Expansion of
    Facilities Completed in 1999

As discussed under Ore Resources and Mining
Rights above, PT Incos operations are conducted
pursuant to a Contract of Work with the Government of Indonesia
under which PT Inco is the sole contractor of
the Indonesian government for the production and marketing of
nickel and associated minerals (other than radioactive
materials) mined in specified areas on the island of Sulawesi.
The original Contract of Work was signed in 1968 and in January
1996 PT Inco signed an agreement with the Government of
Indonesia to modify and extend the Contract of Work to the year
2025, subject to further extensions with the consent of the
Government of Indonesia, from its original expiry date in 2008.
The Contract of Work confers upon PT Inco all
authorizations necessary for the development and operation of
its nickel project.

In late 1999, PT Inco completed a major
expansion project that increased its production capacity by
50 per cent to 68,000 tonnes of nickel-in-matte per
year. The expansion involved improvements to the three existing
smelting lines and the construction of a fourth electric furnace
smelting line together with the construction of
93 megawatts of additional low-cost hydroelectric
generating capacity at Balambano, approximately
25 kilometres from PT Incos production
facilities at Sorowako. The Balambano facility has been able to
generate power consistently above its design capacity due to
improved water management practices and higher reservoir levels
and other related factors than were assumed in developing its
original design capacity.

Financing for the expansion project was provided
by a group of international lenders in the total principal
amount of $340 million for the expansion project and an
additional $81 million to refinance then existing PT Inco
debt. The remainder of the original estimated cost of
$580 million for the project had been expected to be
provided by PT Incos available cash balances plus
cash generated by existing operations during the construction

37



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period. However, as a result of lower production
levels caused by limited rainfall and its adverse effect on
hydroelectric power generation in 1998 and 1997, low nickel
prices and increased costs due to construction delays associated
with its new hydroelectric facilities, PT Incos
ability to generate cash was significantly reduced and, as a
result, Inco Limited agreed in May 1999 to provide
PT Inco with a loan facility under which $88 million
was advanced. These advances have since been repaid.


PT Incos existing hydroelectric
facilities were constructed and are currently operated pursuant
to a 1975 decree of the Indonesian government. This decree,
which effectively also covers the Balambano generating capacity
which was part of the expansion project, vests an Indonesian
ministry with the right, upon two years prior written
notice to PT Inco, to acquire the hydroelectric facilities.
No such notice has been given. If such right were exercised, the
decree also provides that the hydroelectric facilities would be
acquired at their depreciated value subject to the ministry
providing PT Inco with sufficient power to meet its
operating requirements, at a rate based on costs plus a normal
profit margin, for the remaining term of the Contract of Work.

PT Incos estimated ore reserves and
other deposits at Sorowako on the island of Sulawesi are
sufficient to support its operations for more than
20 years, and have the potential to continue to supply
PT Incos operations for a number of additional years.
Future expansions are possible, as warranted by market
conditions, by developing the extensive laterite nickel deposits
within PT Incos Contract of Work area in the Sorowako
outer area and at Bahodopi and Pomalaa, located approximately 80
kilometres and 200 kilometres, respectively, from
PT Incos operations at Sorowako.

When PT Incos Contract of Work was
extended in 1996, PT Inco agreed to several undertakings
with regard to future expansions of its operations. Under one
such undertaking, PT Inco agreed, subject to economic and
technical feasibility, to construct production plants at Pomalaa
in Southeast Sulawesi and Bahodopi in Central Sulawesi. The
Contract of Work indicated that the first plant could be in
operation by 2005 and the second by 2010, but did not specify
which plant was to be constructed first.

In February 2003, PT Inco signed a
Cooperative Resources Agreement (the CRA) with PT
Aneka Tambang Tbk (PT Antam), an Indonesian
government-controlled diversified mining company and producer of
ferronickel whose nickel operations are located near where PT
Inco has certain deposits which we have referred to as the
Pomalaa area within its Contract of Work. Under the CRA,
PT Inco agreed to supply saprolite, a relatively high grade
of lateritic ore, to PT Antam from PT Incos contract
area in Pomalaa at prices based on an agreed upon pricing
formula. The initial term of the CRA is 36 months starting
from the initial delivery of ore by PT Inco to PT Antam.
Initial ore deliveries are currently expected to be made to PT
Antam by the end of the second quarter of 2004. The CRA can be
extended for one or more additional terms of 12 months each
provided PT Antam has fulfilled its obligations under the CRA.
PT Inco has certain unilateral termination rights under the
CRA.

In conjunction with the CRA, PT Inco
obtained the approval of the Indonesian Minister of Energy and
Mineral Resources with respect to PT Inco meeting certain
of its undertakings covering future mining and processing
activities under its Contract of Work by virtue of entering into
the CRA. That approval indicated that PT Inco will be
deemed to have satisfied its obligation to build a commercial
plant at Pomalaa until the later of December 31, 2008 or
the termination of the CRA, following which PT Inco will be
obligated to deliver a report evaluating the technical and
economic feasibility of constructing such a plant to the
Government of Indonesia. PT Incos obligation under
its Contract of Work concerning the construction of a commercial
plant at Bahodopi by 2010, subject to economic and technical
feasibility, remains in effect.

PT Inco believes that the CRA provides a
number of benefits to PT Inco, including (i) enabling
PT Incos saprolite mineral deposits at Pomalaa to be
developed on a basis that should provide PT Inco with a
reasonable return, (ii) satisfying certain of
PT Incos undertakings under its Contract of Work,
(iii) evidencing, in addition to Incos Sorowako
expansion in 1999, Incos continuing commitment to the
Indonesian mining sector at a time of economic and political
uncertainty in that country, and (iv) satisfying certain
concerns relating to regional development expressed by the
provincial and regional governments in Southeast Sulawesi which
have assumed a greater role in the development of regional
natural resources under Indonesias regional autonomy
program.

38



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| |           
| | ----------
| | Operations

Production of nickel-in-matte at PT Inco
increased by 18 per cent to 70,200 tonnes in 2003 from
59,500 tonnes in 2002, reflecting the processing of higher grade
ore and higher overall production levels in 2003 compared with
2002. Production in 2002 decreased by five per cent to
59,500 tonnes from 62,600 tonnes in 2001, reflecting
the planned rebuild of one of PT Incos furnaces and
related facilities during 2002. Nickel-in-matte, an intermediate
product, is sold by PT Inco primarily into the Japanese
market. Approximately 95 per cent of PT Incos
electric power requirements are supplied by its
165 megawatt hydroelectric generating facilities on the
Larona River and its newer 93 megawatt facilities at Balambano
which began operation in 2000. The Balambano facility has been
able to generate power consistently above its design capacity
due to improved water management practices and higher reservoir
levels and other related factors than were assumed in developing
its original design capacity. PT Inco still required
approximately 443,282 tonnes of fuel oil to operate its dryers,
kilns and other oil-fired facilities in 2003.

Largely as a result of improved nickel prices,
PT Incos net earnings, as reported to its
shareholders, were $104 million in 2003, compared with
$30 million in 2002 and $9 million in 2001.
PT Incos net realized price for nickel-in-matte in
2003 averaged $7,117 per tonne ($3.23 per pound),
compared with $5,114 per tonne ($2.32 per pound) in
2002 and $4,836 per tonne ($2.19 per pound) in 2001.
The selling price of PT Incos nickel-in-matte is
determined by a formula which is based upon the LME cash price
for nickel.

The following table shows PT Incos
production, together with deliveries by the Company of finished
nickel refined from PT Incos matte, for the five
years ended December 31, 2003:

|     |  |             |        |                 |  |  |        | 
|---- |  | ----------- | ------ | --------------- |  |  | ------ | 
|     |  | Production  |        | Deliveries of  
|     |  | of Nickel   |        | Finished Nickel
|Year |  | in Matte    |        | to Customers(1)
|     |  |             |        |                
|     |  |            
|     |  | (in tonnes)
|1999 |  |             | 45,400 |                 |  |  | 42,285 | 
|2000 |  |             | 59,200 |                 |  |  | 60,192 | 
|2001 |  |             | 62,600 |                 |  |  | 60,480 | 
|2002 |  |             | 59,500 |                 |  |  | 61,997 | 
|2003 |  |             | 70,200 |                 |  |  | 70,534 | 



---



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 9,638 tonnes in 1999, 12,064 tonnes in
    2000, 12,283 tonnes in 2001, 12,557 tonnes in 2002 and
    14,307 tonnes in 2003 of nickel-in-matte delivered to SMM
    as a final product.

As indicated in the tables on estimated ore
reserves on a Company-wide basis above under Ore Reserves
and Mining Rights, PT Incos estimated ore
reserves at the end of 2003 were 62 million tonnes of
proven reserves grading 1.81 per cent nickel and
45 million tonnes of probable reserves grading
1.80 per cent nickel, compared with 51 million tonnes
of proven reserves grading 1.71 per cent nickel and
40 million tonnes of probable reserves grading
1.76 per cent nickel at the end of 2002(6).

The Indonesian government has indicated that it
intends to exempt those companies operating under Contracts of
Work similar to the one which PT Inco had entered into
prior to 1999 from the scope of legislation originally enacted
in 1999 covering protected forests in Indonesia and limiting the
activities which could be conducted in areas covered by this
law. In early March 2004, the Indonesian government indicated
publicly that it intended to put into effect this exemption for
PT Inco and a number of other mining companies in 2004.





---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | In accordance with applicable Canadian securities
    regulatory requirements, including National Instrument 43-101,
    Standards of Disclosure for Mineral Projects, as
    indicated in Note (3) to the tables entitled Total
    Estimated Ore Reserves as of Year-End 2003 and 2002 above,
    Dr. Lawrence B. Cochrane and Mr. Robert C. Osborne,
    each as a qualified person within the meaning of such National
    Instrument, either indirectly supervised or has been involved in
    the supervision of the preparation of the estimates of such
    proven and probable ore reserves as of year-end 2003 and 2002 in
    accordance with the CIM Guidelines. These estimates would be
    identical under the applicable rules and regulations of the SEC
    and such definitions are substantially the same as the
    corresponding definitions under the SEC rules and regulations.
    Reference is made to such Note (3) to such tables for
    additional information on how PT Incos reserve
    estimates for the 2002-2003 period were prepared.

39



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##### Table of Contents








| |      
| | -----
| | Sales

All of PT Incos production is sold in
U.S. dollars under long-term contracts to Inco and SMM
which, by their terms, continue until the expiration of the
Contract of Work. These contracts provide that if the Contract
of Work is extended or renewed the contracts will be extended
for the period of such extension or renewal. Under these
contracts, about 20 per cent of PT Incos
production is sold to SMM and the balance to Inco.

PT Incos deliveries of nickel-in-matte
totalled 70,500 tonnes in 2003, compared with 61,900 tonnes
in 2002 and 60,500 tonnes in 2001. The Japanese nickel market
continues to be particularly important to PT Inco since
PT Incos operations were conceived, in part, as a
stable source of feed material to Japanese nickel refiners in
the form of a processed intermediate nickel product which could
be imported free of existing Japanese tariffs levied on refined
nickel metal and other finished forms of nickel.

Inco owns a 67 per cent interest in ITL
which processes nickel-in-matte from PT Inco to produce
finished products for the stainless steel industry in Japan.






| |                 
| | ----------------
| | Goro Nickel S.A.

Inco owns an approximately 85 per cent
interest in Goro Nickel, with a French government agency, Bureau
de Recherches Géologiques et Minières
(BRGM), currently holding the other approximately
15 per cent. Goro Nickel holds a number of claims covering
nickel-cobalt properties in New Caledonia, located about 1,500
kilometres east of Australia. These properties have an extensive
laterite resource base, including, as reflected in the tables
above for estimated ore reserves on a Company-wide basis under
Ore Reserves and Mining Rights, an initial mining
zone with, as of year-end 2003 and an estimated 44 million
tonnes of estimated proven ore reserves grading 1.41 per
cent nickel and 0.13 per cent cobalt and 13 million
tonnes of estimated probable ore reserves grading 1.92 per
cent nickel and 0.08 per cent cobalt which has been
outlined as an initial source of feed for a commercial
plant.(7) Given the status of the comprehensive
review of the Goro project referred to below, the capital cost
estimate used for this estimate of ore reserves as at year-end
2003 reflected an increase of approximately 30 per cent
above the capital cost estimate of $1,450 million which had
been based upon the Goro projects March 2001 bankable
feasibility study. This estimated ore reserve base can be mined
using low-cost open pit methods, which, when combined with
Incos proprietary pressure-acid leaching and solvent
extraction (PAL-SX) technology, gives the project the potential
to have one of the lowest cash costs of nickel production in the
world.

In 1999, the Company completed the construction
of an integrated pilot plant in New Caledonia capable of
processing 12 tonnes of ore per day to continue with the
development of the PAL-SX technology required for
commercialization. The pilot plant operated successfully for
over two years, both in further proving the PAL-SX technology
and in training the core workforce for a future commercial plant.

In April 2001, following completion of a bankable
feasibility study, the Company announced that it planned to
proceed with the construction of a commercial nickel-cobalt
project at Goro. The project consists of a fully integrated
mining and processing facility with a planned annual capacity of
approximately 55,000 tonnes of nickel and 4,500 tonnes
of cobalt. The Goro project is currently expected to produce a
nickel oxide product containing 78 per cent nickel and a
cobalt carbonate product. The operation is expected to supply
nickel to stainless steel customers in South Korea, Taiwan and
eventually China. In June 2001, the Company announced that Goro
Nickel had reached an agreement in principle with a joint
venture of Bechtel Overseas Corporation of the United States and
Technip France S.A. of France, in association with Hatch
Associates Ltd. of Canada as subcontractor, to act as the prime
contractors for the construction of the Goro project, and the
definitive contracts with the joint venture companies were
signed in April 2002.





---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(7) | In accordance with applicable Canadian securities
    regulatory requirements, including National
    Instrument 43-101, Standards of Disclosure for
    Mineral Projects, as indicated in Note (3) to the
    tables entitled Total Estimated Ore Reserves as of
    Year-End 2003 and 2002 above, Mr. Robert A. Horn has,
    as a qualified person within the meaning of such National
    Instrument, indirectly supervised the preparation of the
    estimates of such proven and probable ore reserves as of
    year-end 2003 in accordance with the CIM Guidelines. These
    estimates would be identical under the applicable rules and
    regulations of the SEC and such definitions are substantially
    the same as the corresponding definitions under the SEC rules
    and regulations. Reference is made to Note (3) to such
    tables for additional information on how the reserve estimates
    for the 2002-2003 period were prepared.

40



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##### Table of Contents



During 2002, Inco proceeded with the commercial
development of the Goro project. In early September 2002, the
project experienced labour disruptions by personnel associated
with certain project construction subcontractors. As a result of
these disruptions, a decision was made to curtail certain
activities at the project site to enable Goro Nickel,
contractors, subcontractors and other interested parties to
develop procedures to avoid future disruptions. Over the
September to November 2002 period, a number of procedures were
put in place as part of a phased resumption of certain of the
project activities that had been curtailed. At the same time
that the labour disruptions referred to above occurred, Inco
began updating the status of certain key aspects of the project,
including the necessary permitting, capital cost estimate,
project schedule and organization. Work on certain critical
parts of the project, including engineering, continued during
this update process.

On December 5, 2002, the Company announced
that it would be undertaking a comprehensive review of all key
aspects of the Goro project. This action was based upon
information received by the Company from the joint venture
companies referred to above acting as the prime construction
contractors that, if confirmed, would indicate an increase in
the capital cost estimate for the project in the range of 30 to
45 per cent above the then current capital cost estimate of
$1,450 million. The objective of the comprehensive review
was to assess all information on the Goro project, including the
various cost estimates and trends, and determine what changes in
the capital cost estimate and the project could be made to
maintain the projects economic feasibility. As a result of
the temporary suspension of certain development activities and
other actions which had been taken by year-end 2002 during this
review process, the Company recorded a pre-tax charge of
$25 million in the fourth quarter of 2002. This charge was
comprised of pre-tax expenses of $62 million relating to
the cancellation or termination of certain outstanding
contractual obligations, to accrue for demobilization costs and
to reduce the carrying value of certain assets relating to the
project, partially offset by currency gains of $37 million
as a result of the ineffectiveness of certain forward currency
contracts that had been entered into for hedging purposes. As
part of the comprehensive review, we also evaluated various
contractual and other arrangements covering construction and
other work relating to the Goro project and implemented certain
actions to suspend or terminate certain of those contractual
arrangements.

As the comprehensive review of the Goro project
that began in December 2002 moved forward during 2003, it
evolved into two phases. The first or initial phase, which was
completed in July 2003, focused on the identification of issues
that had resulted in, or created, actual or potential increases
in capital costs and how those issues could be addressed and
other actions that could be taken to reduce these costs. On
August 13, 2003, we announced the results of the initial
phase of the review. The second phase, or Phase Two, which began
essentially in August 2003, is intended to evaluate further
opportunities to reduce costs and develop, among other key
deliverables, a new capital cost control estimate, project scope
and schedule and execution plan for the project. While one of
the Companys objectives of Phase Two of our review is to
have a capital cost estimate for the project of
$1.8 billion, the conclusion of that review could result in
a capital cost estimate higher than this objective.

As of December 31, 2003, the Company had
spent approximately $600 million on the Goro project since
July 1, 2001 when this project was formally launched. This
amount excludes a current estimate of approximately
$58 million that would still have to be spent for
equipment, services and other requirements under existing
contracts and commitments, and accruals of approximately
$31 million relating to such requirements as of
December 31, 2003, most of which expenditures are expected
to have value for the project. The Company currently believes
that, based upon the focus on certain potential new approaches
to construction as part of, and the expected results of, the
Phase Two review as it moves to completion, it will be required
to take additional non-cash charges beyond those taken in the
fourth quarter of 2002 but we cannot predict at this time the
amount of such non-cash charges and whether they will have a
material effect on our results of operations, financial
condition or profitability.

While the key objective of Phase Two of the
review is to have a project that will produce an acceptable rate
of return on the investment to be made in this project, if, upon
completion of this phase of the review, the Company were to
conclude that the Goro project could not proceed or be
restructured to meet our rate of return on investment
requirements, the Company currently expects that it would
undertake a further evaluation to determine how the project
could be restructured to provide an acceptable return on the
investment to be made. Depending upon the timing of the
completion of such further evaluation, or if that further
evaluation did not occur

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##### Table of Contents



or did not result in achieving an acceptable
return, the Company would have to consider writing off all or a
substantial portion of the carrying value of the Goro project,
approximately $802 million at December 31, 2003, and
the Company would also lose the expected future production from
Goro. Such a result would have a material adverse effect on our
business, results of operations, financial condition,
profitability and cash flows.


The New Caledonian authorities enacted a fiscal
regime in 2001 which provides a nominal 15-year tax holiday plus
an additional five years at tax rates that are 50 per cent
of the prevailing tax rates for qualifying metallurgical
companies. If the project achieves an internal rate of return in
excess of a cumulative threshold rate during this 20-year
period, the applicable tax rates or levels for the project would
then be adjusted prospectively to be equivalent to the general
rates or levels then in effect for mining and processing
companies.

New Caledonia is currently an overseas
territorial community (collectivité territoriale) of
France having special legal status under the French
constitution, including significant autonomy except in foreign
relations, defence, justice, currency and certain other related
areas. As part of the objective of increasing New
Caledonias autonomy from France and to implement
arrangements to address political and other issues that New
Caledonia had experienced, in 1998 the French government, the
New Caledonian government and two New Caledonian political
movements representing the native population entered into the
Noumea accord. This accord sets forth a process and timetable
for increasing the autonomy of New Caledonia over the next
14 years, culminating in a referendum to be held by 2018 on
whether New Caledonia would become fully independent from
France. As part of the initial phase of the accord, steps have
been taken, and will be taken over the next few years, to
develop the form of provincial governments to be part of the New
Caledonian government structure and to pass local legislation,
including the enactment of a new mining law, that will provide
for the transfer of certain authority in a number of areas still
maintained by France to the New Caledonian government. The
Company does not believe that these developments will have an
adverse effect on the Goro project but there can be no
assurances in this regard. Provincial elections are currently
planned for early May 2004 for the election of members of the
three provincial assemblies in New Caledonia. Each assembly will
select its president and who will be part of the provinces
executive board. The members of the newly elected provincial
assemblies will also select the persons who will serve as
members of the Congress of New Caledonia. This Congress is
responsible for the selection of the President of New Caledonia.

In September 2001, Goro Nickel S.A. (then known
as Compagnie des Mines de Xere) applied for an exploration
permit for an area next to the Goro deposit known as Prony West.
Several other companies applied for the same exploration permit.
After an assessment of the various applications, the government
of the South Province of New Caledonia determined that Goro
Nickels application as being the best technically and
offering the greatest financial commitment. As such, the South
Provinces recommendation to accept Goro Nickels
application was discussed at the mining committee
(Comité Consultatif des Mines) in April 2002 and the
recommendation to accept Goro Nickels application was
subsequently approved by the mining council (Conseil des
Mines) the same day. In July 2002, after a public debate on
the awarding of this exploration permit, the legislative
assembly of the South Province voted to award the Prony West
exploration permit to Goro Nickel. As soon as this decision was
made, several companies challenged the South Provinces
decision. The administrative tribunal which considered this
challenge released its decision on December 24, 2003. The
administrative tribunal decided that the legislative assembly of
the South Province did not have the authority to make the award
as this authority had been previously delegated to the Executive
Committee of the South Province and that the delegation had not
been withdrawn. As a result of this decision, the exploration
permit previously awarded to Goro Nickel was cancelled. However,
after the cancellation of this permit, on December 27, 2003
the Executive Committee of the South Province met and reawarded
the exploration permit to Goro Nickel. This decision to reaward
the permit to Goro Nickel is open to challenges until
April 20, 2004. As of March 12, 2004 no such
challenges have been made.






| |                                        
| | ---------------------------------------
| | Voiseys Bay Nickel Company
    Limited






| |                     
| | --------------------
| | Voiseys Bay Deposit

The Voiseys Bay deposit consists of three
main bodies of mineralization, the Ovoid, the Eastern Deeps and
related deposits and the Western Extension, including the Reid
Brook and Discovery Hill zones and other small

42



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##### Table of Contents



zones. As of year-end 2003, as reflected in the
tables entitled Total Estimated Ore Reserves as of
Year-End 2003 and 2002 under Ore Reserve and Mining
Rights above, proven and probable ore reserves of
30 million tonnes grading 2.85 per cent nickel,
1.68 per cent copper and 0.14 per cent cobalt were
estimated for the Ovoid, based on a mill throughput of 6,000
tonnes per day. Reference is made to the notes to these tables
for information on how these reserves were estimated and how the
Company meets certain Canadian securities regulatory
requirements for the purpose of any ore reserve estimates it
might prepare.


While the Ovoid deposit is accessible by open-pit
mining, most of the mineralization discovered to date in the
remaining bodies is not amenable to open-pit mining. Preliminary
mining assessments were carried out on the Eastern Deeps,
Discovery Hill and the upper portion of the Reid Brook deposits
in 2002 and early 2003. The results of these assessments were
used to plan the 2003 advanced exploration program. The results
of this ongoing surface exploration program, which is continuing
as part of the 2004 exploration program, will be used to
delineate these deposits sufficiently to carry out preliminary
feasibility studies for these deposits. Several additional
target areas have been identified on the Voiseys Bay main
block of claims. These are geophysical targets well to the east
of the known deposits and are planned to be assessed as part of
the 2004 exploration program.

VBNCs exploration expenditures in Labrador
totalled $1 million in 2003, compared with $180,000 in 2002
and $4 million in 2001. Although definition drilling was
carried out on the Discovery Hill and Reid Brook Zones as part
of the first phase of the 2003 advanced exploration program, no
exploration drilling was carried out in 2003 and only a limited
amount is planned for 2004. Most of the 2003 exploration work
was concentrated on further evaluation of the Ryans Pond
prospect which is located on the main block of claims
approximately three kilometres to the east of the known
deposits. The program consisted of geophysical surveys,
including borehole and surface electromagnetic surveys.
Evaluations of the exploration claims held by VBNC in Labrador
continued in 2003 and by the end of the year none of the
regional claims, outside of the main block of claims which
contains all the currently known ore reserves, were considered
to have any further exploration potential and these claims were
relinquished to Archean under the terms of the Option Agreement
referred to above.






| |                             
| | ----------------------------
| | Environmental Review Process

The scope of the environmental review and
approval process for the Voiseys Bay project was
established under a January 1997 memorandum of understanding
among the Governments of Canada and the Province of Newfoundland
and Labrador (the Province), the LIA and Innu Nation
on a harmonized environmental review process for the mine,
concentrator and related facilities and infrastructure in the
Voiseys Bay area (the Mine/ Concentrator
Project).

The Mine/Concentrator Project was the first major
mining project to be subject to full review under the
Canadian Environmental Assessment Actsince this
legislation came into effect in January 1995. In early 1997, a
five-person environmental assessment panel was selected pursuant
to the January 1997 memorandum of understanding to conduct the
environmental assessment of the Mine/ Concentrator Project. The
environmental assessment process, including public hearings,
were held over the 1998 to 1999 period and the panel issued its
report and recommendations in April 1999. The panel recommended
that the Mine/ Concentrator Project proceed subject to a number
of other separate recommendations. In August 1999, the federal
and provincial governments announced their respective detailed
responses to the environmental assessment panels
recommendations. Both governments released the Mine/
Concentrator Project from the environmental assessment process
subject to certain terms and conditions, including measures
intended to mitigate potential environmental effects relating to
the Mine/ Concentrator Project, and accepted a number of the
panels recommendations. The Company does not believe that
those recommendations or the terms and conditions of the
releases stipulated by the governments will create any unduly
burdensome financial or other restrictions on the
Mine/Concentrator Project.

In 1999, the federal and provincial governments
entered into negotiations with the LIA and Innu Nation to
develop a project-specific environmental management agreement
for the issuance of the necessary governmental licences and
permits for the Mine/Concentrator Project. With the agreement on
the commercial development of the Voiseys Bay project
which having been reached in mid-2002, as discussed below, these
discussions restarted and in July 2002 the governments entered
into an environmental management agreement with the LIA and Innu

43



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##### Table of Contents



Nation which created an environmental management
board in order to provide for participation by these aboriginal
groups in the process leading to the issuance of the necessary
licences and permits for the Mine/Concentrator Project. The
environmental management board has been meeting since it was
created in July 2002 to address the issuance of the necessary
permits and licences for the Mine/Concentrator Project,
including the mining and surface leases issued to VBNC pursuant
to the definitive agreements entered into with the Province of
Newfoundland and Labrador, as discussed below. In 2003, over 100
permits were issued for the construction and operation of the
Voiseys Bay project.


In early September 1999, separate court actions
were filed in the Canadian federal courts by the LIA and Innu
Nation asserting that the federal government should have imposed
additional conditions to, and did not meet certain consultative
and other requirements in arriving at, its decision to release
the Mine/Concentrator Project from the environmental assessment
process. These actions were stayed pending the outcome of the
ongoing negotiations of separate impacts and benefits agreements
(IBAs) with the LIA and Innu Nation and in the
summer of 2002 both of these court actions were discontinued as
conditions to the effectiveness of the IBAs that VBNC entered
into with the two aboriginal groups, as discussed below. In
addition, in mid-October 1999 another aboriginal group, the
Nunavik Inuit, filed an action against a federal minister in the
Canadian federal courts, asserting that its rights had not been
properly considered or protected in land claims negotiations and
the agreement in principle on land claims reached in May 1999
between the federal government and the LIA. This dispute was
settled and the action was discontinued by the Nunavik Inuit.






| |                                    
| | -----------------------------------
| | Negotiations with Aboriginal Groups

In June 2001, when confidential negotiations with
the Province restarted on the terms that would enable the
project to proceed, VBNC also resumed separate IBA negotiations
with the LIA and Innu Nation. VBNC reached agreement on IBAs
with both the LIA and Innu Nation in May 2002. These IBAs were
subsequently ratified by the respective memberships of the two
aboriginal groups and were signed by the parties effective
July 29, 2002. The IBAs set forth (i) certain payments
to be made to the LIA and Innu Nation by Inco and VBNC over the
life of the Voiseys Bay project, (ii) programs
relating to training, employment and business opportunities for
the LIA and Innu Nation and (iii) the participation of the
LIA and Innu Nation in environmental and certain other programs
and procedures relating to the operation of the
Mine/Concentrator Project, among other things.

The Company understands that, following separate
confidential negotiations between each of the LIA and Innu
Nation and the Governments of Canada and the Province of
Newfoundland and Labrador, interim agreements were reached to
resolve the respective land claims of the LIA and Innu Nation in
July 2002. Neither VBNC nor the Company was a party to these
agreements nor to the negotiations leading to those agreements.
The LIA has since reached agreement with the federal and
provincial governments on how their claims relating to
Voiseys Bay would be addressed in its final land claims
agreement, as well as an interim measures agreement to allow the
Mine/Concentrator Project to proceed. The Company understands
that the federal and provincial governments and the LIA during
2003 continued their negotiations towards the conclusion of a
final comprehensive land claims agreement among those parties.
The Company also understands that the LIA in early 2004
commenced a community-based ratification process to ratify the
final comprehensive land claims agreement among those parties.

Innu Nation had indicated in January 1999 that it
was evaluating the alternatives available to it in pursuing its
land claims. In the fall of 2000, Innu Nation and the
federal government began negotiating the registration of the
Innu people of Labrador to become eligible for benefits under
the Indian Act(Canada). Innu Nation has also reached
agreement with the federal and provincial governments on how
their claims relating to Voiseys Bay would be addressed in
its final land claims agreement, and entered into a memorandum
of agreement under which Innu Nation agreed, among other things,
not to assert any aboriginal land claims in the Voiseys
Bay area, thereby allowing the Mine/ Concentrator Project to
proceed. The Company has been advised that the Innu of Labrador
were registered for eligibility under the Indian Actin
November 2002, and that work continues on the creation of Indian
reserves for Innu communities in Labrador. The Company also
understands that the federal and provincial governments and Innu
Nation in 2003 continued negotiations towards the conclusion of
a final comprehensive land claims agreement, but no such
agreement has as yet been reached.

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| |                                                
| | -----------------------------------------------
| | Negotiations with the Provincial
    Government

In mid-1998, following confidential discussions
with the Government of Newfoundland and Labrador, the Company
and VBNC proposed to provincial officials an initial Mine/
Concentrator Project to produce intermediate concentrate from
the Voiseys Bay deposit, with the concentrate to be
further processed at the Companys existing processing
facilities in Ontario and Manitoba, where there will be excess
capacity. As part of this initial phase of the project, the
Company proposed to carry out an extensive underground
exploration program to determine the economic feasibility of the
underground deposits at Voiseys Bay. The Companys
proposal also included the development, if and when economic, of
additional processing facilities in the Province. This approach
is similar to the approach used successfully in Sudbury and
other nickel locations where facilities have been developed in
stages as additional ore reserves have been proved. In July
1998, the Province turned down this proposal and suspended
negotiations with the Company.

Over the last half of 1999, the Company engaged
in discussions with the provincial government on a revised
project framework for development of the Voiseys Bay
deposit. These negotiations did not result in an agreement as
the Province insisted that the Company provide an unconditional
guarantee that processing facilities would be built in the
Province, even if they were not economic. No further
negotiations were held until June 2001, when the Company resumed
confidential negotiations with representatives of the Province
of Newfoundland and Labrador concerning the terms of an
agreement on the commercial development of the Voiseys Bay
deposit. These negotiations continued in the first half of 2002
and on June 11, 2002 the Company and the Government of
Newfoundland and Labrador announced their agreement on a
non-binding statement of principles covering the development of
the Voiseys Bay project. The statement of principles was
approved by the provincial legislature in late June 2002 and on
October 7, 2002 Inco and VBNC signed definitive agreements
with the Government to implement the terms of the statement of
principles. The definitive agreements provide for the
development of a mine and concentrator processing plant at
Voiseys Bay, representing the Mine/ Concentrator Project,
a research and development program focusing on
hydrometallurgical processing technologies, an industrial and
employment benefits program for the Voiseys Bay project, a
timetable for the start and completion of the principal stages
of the project, and other key parts and requirements covering
the overall development of the Voiseys Bay project. The
definitive agreements set forth certain obligations of the
Company to construct and operate (i) a demonstration plant
in the Province as part of the overall research and development
program to test hydrometallurgical processing technologies to
treat nickel-containing ores or intermediate products from the
Voiseys Bay deposits and (ii) subject to technical
and economic feasibility pursuant to the terms thereof, a
commercial processing facility in the Province by the end of
2011 to treat all of the Voiseys Bay ores or intermediate
products to produce finished nickel and cobalt product based
upon hydrometallurgical processing technologies or, if such
technologies do not meet certain technical and/or economic
feasibility requirements, as may be determined by one or more
agreed upon experts as provided for in such agreements, a
conventional refinery. Once the demonstration plant is completed
and has received intermediate concentrate product from the Mine/
Concentrator Project for testing, Inco can ship quantities of
intermediate concentrate products produced by the Mine/
Concentrator Project containing nickel and/or cobalt to the
Companys facilities in Ontario and Manitoba for further
processing into finished nickel and cobalt product. Shipments of
such Voiseys Bay intermediate concentrates are limited to
certain maximum aggregate quantities and will end when the
construction of the hydrometallurgical or conventional matte
commercial processing facility, as the case may be, is completed.

Under the definitive agreements, Inco is also
required, prior to the cessation of the Voiseys Bay mining
operations in the Province, subject to certain exceptions
relating to the availability of such external sources, to bring
into the Province for further processing at the
hydrometallurgical or conventional matte processing facility to
be constructed in the Province from sources outside the
Province, in one or more intermediate forms, quantities of
intermediate products, subject to certain annual minimum
quantities, containing in total quantities of nickel and cobalt
equivalent to what was shipped to the Companys Ontario and
Manitoba operations. The definitive agreements also set forth
(1) the Companys commitment to an underground
exploration program covering the Voiseys Bay deposits with
the objective of discovering sufficient nickel-containing ore
reserves for processing beyond the initial phase of the
Voiseys Bay project, (2) the terms under which the
processing of copper intermediate in the Province would be
justified, and (3) the Provinces commitment to
(i) the tax regime that will

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apply to the project, (ii) electric power
rates for the project and (iii) the issuance of the
necessary permits and authorization to enable the Voiseys
Bay project to proceed. The definitive agreements also provide
for programs and arrangements relating to employment and
industrial benefits in connection with the construction and
related aspects of the project. The definitive agreements also
include specific sanctions if the Company were not to meet
certain of its contractual obligations under such agreements,
including the effective forfeiture of its lease to conduct
mining operations in the Province. Under the terms of the
definitive agreements, certain provisions became effective when
these agreements were executed. The next steps which were to be
met by the end of the first quarter of 2003 for these agreements
to become effective overall include the securing of acceptable
financing arrangements for the project and completing a bankable
feasibility study for the first phase of the project, including
the Mine/ Concentrator Project. As discussed under Project
Phases below, the bankable feasibility study was completed
in late March 2003. In March 2003, the Company advised the
Province that it was waiving the financing condition in these
agreements. The remaining conditions to the effectiveness of
these agreements were met in the third quarter of 2003.







| |               
| | --------------
| | Project Phases

The Company announced in late March 2003
(i) the results of a bankable feasibility study for the
mine and concentrator for the Ovoid and adjacent surface
deposits and related facilities representing part of the initial
phase of the Voiseys Bay project and (ii) that it
planned to proceed with this initial phase. Based upon the
results of the study, the estimated total capital cost for the
Mine/ Concentrator Project was estimated to be
$582 million, including $35 million spent since July
2002 on infrastructure and related work. The $582 million
amount represented an increase of $77 million or about
15 per cent over the prefeasibility study estimates for the
Mine/ Concentrator Project. This estimate included a
$54 million contingency. The initial phase of the
Voiseys Bay project will also involve a research and
development program covering hydrometallurgical processing
technologies (the Hydromet R&D Program) for the
treatment of the Voiseys Bay nickel and cobalt-containing
concentrates to be produced into finished nickel and cobalt
product, including a demonstration plant to be constructed in
Argentia, Newfoundland. As of March 2003, the Hydromet R&D
Program was expected to cost approximately $134 million or
about 14 per cent above the initial estimate for this
program. It is possible that the cost of this program may be
higher but we cannot currently predict what the increase in such
cost will be. In addition to the Mine/ Concentrator Project and
the Hydromet R&D Program, the initial phase will include
handling facilities to be constructed at our Canadian operations
for the nickel and cobalt-containing concentrates to be
processed over the 2006  2011 period once the Mine/
Concentrator Project and the demonstration plant are in
operation, at an estimated cost of $47 million, and an
exploration program at an estimated cost of $13 million.
The total capital cost estimate for all four parts of the
initial phase of the Voiseys Bay project is
$776 million, or about 14 per cent above the original
estimate of $680 million. The engineering firm retained to
complete the study indicated that it believed that the capital
cost estimate was within a range of plus 15 per cent and
minus 5 per cent of the $547 million figure still to
be spent for the Mine/ Concentrator Project. Given that we
currently expect that a significant portion of these costs will
be incurred in Canadian dollars, we have entered into Canadian
dollar hedges for approximately 68 per cent of the total
expected costs in Canadian dollars for the related assets,
including Cdn. $535 million of hedges at an average
exchange rate of $0.746 entered into as at March 12, 2004.
The $776 million estimate assumed a Canadian
dollar-U.S. dollar exchange rate of approximately Cdn.$1.00
to $0.66. At exchange rates in effect at March 12, 2004,
taking into consideration the forward currency contracts noted
above, this estimate would be $888 million. To the extent
that this currency exposure is not hedged at exchange rates
equivalent to this assumed rate, then this capital cost estimate
could rise, adversely affecting the projected returns on our
investment in this project.

As discussed above, the Company began
infrastructure, site development and other work in July 2002
with respect to the initial phase of the project of
approximately $35 million over the July 2002 to March 2003
period. The Company currently expects initial concentrate
production from the first phase of the project in 2006 for
shipment to the Ontario and Manitoba operations while the
hydrometallurgical process is being tested in the planned
demonstration plant. Assuming technical and economic success, a
commercial hydrometallurgical processing plant will be built as
part of the second phase of the project between 2009 and 2011.
As noted above, in the unlikely event that the
hydrometallurgical process proves not to be technically and/or
economically feasible, a conventional refinery will be built to
produce finished nickel product. It is expected that the
Voiseys

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Bay hydrometallurgical plant will produce
approximately 50,000 tonnes of nickel, 2,300 tonnes of cobalt,
up to 7,000 tonnes of copper intermediates, and 32,000 tonnes of
copper concentrate annually. A total investment, based upon the
updated capital cost estimate for the initial phase and the
prefeasibility studies for the other two phases of the project,
of approximately $2,000 million would be required for all
phases of the project over the 30-year life of the project,
including estimated sustaining capital.







| |                        
| | -----------------------
| | Asset Impairment Charge

On June 11, 2002, Inco announced that it
would be undertaking a review of the net carrying value of the
Voiseys Bay project in view of the statement of principles
entered into with the Government of the Province of Newfoundland
and Labrador on that date and other arrangements with key
stakeholders that would enable the development of the
Voiseys Bay project to proceed. The Company had previously
noted on a number of occasions in its public filings and other
documents that such events, if and when they were to occur,
might require a significant reduction in the carrying value of
the Voiseys Bay project and in the related deferred income
and mining tax liability and in shareholders equity. This
review, which was completed in July 2002, included an analysis
of the key assumptions which the Company utilized in evaluating
this net carrying value on a quarter-to-quarter basis relating
to a number of important factors, including the Companys
best assessment of the expected cash flows from the project, how
the development of Voiseys Bay, taking into account the
agreements which have been reached, fits within the
Companys overall long-term development plans and updated
mining and other cost assumptions. As a result of this review,
the Company recorded a non-cash charge of $1,552 million,
net of deferred income and mining taxes of $770 million, in
the second quarter of 2002 to reduce the $3,753 million net
carrying value of the Voiseys Bay project to
$2,201 million. In 2000, as a result of a change in
Canadian generally accepted accounting principles, the deferred
income and mining tax liability associated with Voiseys
Bay was increased by $2,222 million and the carrying value
of Voiseys Bay was also increased by this same amount.






| |        
| | -------
| | Exmibal

The mining and processing facilities of the
Companys 70 per cent-owned Guatemalan subsidiary,
Exploraciones y Explotaciones Mineras Izabal, S.A.
(Exmibal), which has a design capacity of about
11,300 tonnes of nickel-in-matte annually, have been mothballed
since 1982. Exmibal has a nickel deposit which could be brought
back into production under appropriate market conditions.
However, the recommencement of operations at these facilities
would require substantial capital expenditures and start-up
costs.

During 2003 Inco continued to have preliminary
discussions with parties interested in developing the existing
power plant facility as part of a power generating project in
Guatemala and acquiring certain rights to develop the Exmibal
deposits. A letter of intent was entered into in November 2003
covering the possible terms under which the Exmibal deposits
could be commercialized by one of these parties. A number of
terms and conditions, including obtaining satisfactory
financing, would have to be met under the letter of intent to
enable the party seeking to develop such deposits to obtain
certain rights covering such development, subject to meeting
certain milestones. The letter of intent provides that Inco
would receive a minority interest in the company who would
commercialize there deposits and have certain rights, including,
the right market in products produced by that company and to use
any proprietary technologies developed by that company.






| |                                        
| | ---------------------------------------
| | Exploration and Project
    Development

One of the objectives of Incos exploration
program is to provide the Company with sufficient ore reserves
to sustain production at current levels for at least
20 years at its Ontario and Manitoba operations. See
Mining and Production  General above for
further information on the Companys planned production
levels and Ore Reserves and Mining Rights in Canada
above for information on the Companys proven and probable
ore reserves. The Company continues to pursue exploration
opportunities for platinum-group metals in Ontario.

Exploration expense totalled $27 million in
2003, compared with $24 million in 2002 and
$23 million in 2001. Exploration efforts continue to focus
on finding additional high-grade nickel deposits in Canada near
existing mine workings to expand the Companys estimated
ore reserves and provide additional feed for existing

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processing facilities. Of the total exploration
expenditures in 2003, $11 million was spent on exploration
in Ontario and Manitoba directed at finding additional nickel,
copper and platinum-group metals estimated ore reserves near the
Companys existing mines, compared with $9 million in
2002 and $10 million in 2001. Additions to estimated ore
reserves from the evaluation of diamond drilling in 2003
totalled 2.5 million tonnes averaging 1.5 per cent
nickel and 2.7 per cent copper at the Companys
Ontario operations and 1.9 million tonnes averaging
1.5 per cent nickel and 0.1 per cent copper at the
Companys Manitoba operations. The Company also continued
to evaluate non-nickel exploration targets and joint venture
opportunities that have the potential to enhance the
Companys overall mining operations.


In 2003, deteriorating ground conditions at the
Ontario operations Copper Cliff North mine reduced
production from that mines 138 ore body high-grade
precious metal zone. As a result, the additional production of
precious metals (platinum plus palladium plus gold) that was
expected to be produced from that mine in 2003 was not realized.
The ground conditions problem was resolved and it is expected
that the quantities of precious metals that had been planned to
be produced from this mines 138 ore body will be achieved
in 2004, bringing the total expected production of precious
metals from this zone to about 2,000 kilograms in 2004.
Exploration drifting on the 3,400-foot level of this mine is
scheduled to be completed in 2004, allowing drilling of this
mines lower 138 ore body high-grade precious metals zone.
A feasibility study is currently being completed on the
mineralized material that forms a halo surrounding the 138 ore
body from the 1,050-foot level to the 1,400-foot level. A
feasibility study on the remnants of the upper 138 ore body was
completed in 2003. Work in 2004 is expected to be focused on the
inclusion of this remnant ore into the production plan for the
Copper Cliff North mine.

By the end of the first quarter of 2004, the
physical connection between the Companys Ontario
operations Copper Cliff North and Copper Cliff South mines
is expected to be complete. Some equipment and services will be
shared between the mines and the connection will provide the
Copper Cliff North mine with ramp access to the surface through
Copper Cliff South mine. Work is then expected to begin on a
drive on 3,400-foot level of the Copper Cliff North mine to that
mines 880 ore body which will provide access to explore
for potential down-dip extensions to that ore body.

In 2003, exploration drilling continued on the
191 ore body of the Copper Cliff North mine with respect to a
potential new zone located adjacent to the footwall of the main
191 deposit at the 4,600-foot to 4,800-foot levels. This program
is planned to continue in 2004.

Underground exploration drilling continued in
2003 on the 170 footwall high-grade precious metals deposit at
the Ontario operations McCreedy/ Coleman mine. The
drilling and follow-up evaluations have resulted in the addition
of 0.2 million tonnes of estimated ore reserves, bringing
the estimated ore reserve for this deposit to 1.8 million
tonnes of probable ore reserves grading 7.0 per cent
copper, 0.9 per cent nickel and 15.1 grams per tonne of
combined platinum, palladium and gold. Advanced exploration is
planned in 2004 to expand the estimated ore reserve and assess
the detailed variation in the thickness and orientation of the
sulphide veins found in this deposit. The $33 million
Phase 2 project to develop a high-grade nickel deposit at
McCreedy/ Coleman Mine, which was announced in 2000, was under
budget and on schedule until the work stoppage that occurred as
a result of the three-month strike which began June 1,
2003. This project is expected to allow McCreedy/ Coleman Mine
to increase its production by over 60 per cent from 2002
levels by early 2005. The $34.8 million Phase 3
project for this mine, which was announced in 2003, was also on
budget and on schedule until the work stoppage.

The Companys surface exploration program
continued in 2003 to test and evaluate both near-mine and new
exploration targets in the South Range and East Range of the
Sudbury basin, the Copper Cliff and Worthington Offsets and the
footwall of the North and East Range.

At the Copper Cliff offset, a surface drilling
program was initiated to test large gaps in drilling located
between the Pump Lake mineral deposit at the Copper Cliff North
mine and the Murray mine. This program was halted as a result of
the three-month strike at the Ontario operations but will resume
in 2004.

An advanced surface exploration program was
completed in 2003 at the 740 zone in the Kelly Lake ore
body at the Copper Cliff South mine. This program was successful
in further defining continuity and grade distribution

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of the zone and increasing the grade and tonnage
of the estimated ore reserve. In addition, the program
identified further exploration targets for follow-up in 2004.


An exploration program was initiated in the East
Range of the Sudbury basin designed to follow up on geophysical
conductors identified during an ongoing program of resurveying
and deepening old exploration boreholes. Exploration focused on
the Ella Lake area where a new zone of contact mineralization
was identified. Further drilling is planned to the footwall of
this zone for high-grade footwall-type mineralization in 2004.

In October 2000, a decision was made to proceed
with a $12 million project to develop the low-grade area of
the Ontario operations Stobie mine. The development and
construction needed for production to begin through the
ore-handling component of this project was completed in late
2001. Ongoing lateral development and construction on the
individual mining levels are scheduled to continue until the end
of 2005. Production from this project began in 2001 and is
expected to be at 5,900 tonnes of ore per day in 2004,
increasing to 6,700 tonnes of ore per day in 2006. The
current plans are to operate a new ore-handling system as part
of this project until the end of 2006.

In 2003, development work continued on the first
of the expected two phases of the Creighton Deep project, a
project that was originally announced in 1998. Capital
expenditures on this project totalled $2.7 million in 2003.
The development of the second production level (the 7,680-foot
level) as part of the first phase began in early 2003 and the
first phase of the project is expected to be completed in 2006.
Production from the first phase totalled 111,800 tonnes of
ore grading 4.0 per cent nickel and 2.5 per cent
copper in 2003 and production is expected to continue at a rate
of approximately 300,000 tonnes of ore per year until 2015
if the Company proceeds with the second phase of the project.
The Company is currently evaluating the second phase of this
project which would involve access to an additional ore body at
Creighton Deep. The estimated ore reserve that would be accessed
in the second phase of the project is 4.0 million tonnes
grading 3.7 per cent nickel and 3.9 per cent copper
between the 7,680-foot level and the 8,220-foot level. This
estimate includes an additional 660,000 tonnes of ore
grading 4.0 per cent nickel and 5.1 per cent copper
added in 2003 as a result of exploration in a high-grade
footwall zone.

In 2002, a decision was made to proceed with a
$67 million project to deepen Garson mine from the
4,470-foot level to the 5,070-foot level to access seven million
tonnes of proven ore reserves grading 1.76 per cent nickel,
1.37 per cent copper and 1.1 grams per tonne of
combined platinum-group metals and gold. This project is
expected to increase mine production at Garson Mine by
10 per cent to 2,087 tonnes of ore per day and extend
the life of the mine until approximately 2012. Construction of
major mine facilities and development as part of this project
started in the summer of 2002. The project is on schedule to
ramp-up to full production by the fourth quarter of 2004.

In January 2002, the Company entered into an
option agreement with FNX Mining Company Inc. (FNX)
relating to certain rights extended to FNX to explore and
develop five non-core properties of the Company in the Sudbury
basin. The properties covered by this agreement all have a
history of past production but were inactive and the Company had
no further plans for the exploration or development of these
properties. Subject to meeting certain conditions enabling it to
exercise the option to acquire a 100 per cent interest in the
mineral rights to these properties, FNX agreed, pursuant to the
terms of the option agreement, to spend Cdn.$14 million
over a 16-month period beginning in January 2002 and was granted
an option to earn a 100 per cent interest in the mineral
rights in these properties by spending a further
Cdn.$16 million over the next four years. On
December 10, 2003, FNX announced that, effective
December 1, 2003, it had completed its total expenditure
commitment and had exercised its option to acquire a 100 per
cent interest in the mineral rights covering the properties. As
part of the agreement, Inco had initially acquired common
shares and common share purchase warrants of FNX representing a
total equity interest in FNX of 19.9 per cent on a
fully-diluted basis. However, the Companys ownership
position was diluted to about 12 per cent as of year-end
2002 due to the issuance of additional shares by FNX and the
sale of FNX shares by the Company. The Company completed the
sale of its shares in FNX in May 2003. Under the terms of a
related offtake agreement, Inco also has the right, but not
the obligation, to purchase and refine all of the ore production
from the properties covered by the option agreement. During
2003, exploration, consisting of surface and underground diamond
drilling, ground and airborne geophysics, mapping, and
prospecting was carried out on the properties covered by the
option agreement. In addition FNXs partner,

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Dynatec Corporation, commenced advanced
underground exploration, development and mining at one of the
properties. FNX is currently shipping ore to the company from
one of the properties under the offtake agreement.


In the Thompson nickel belt, the regional surface
exploration program continued over the OIC Leases that were
issued to the Company by the Province of Manitoba. The surface
geophysical component of the regional exploration program was
completed in 2003. Follow-up drilling on several targets which
had been outlined was carried out. The drilling confirmed the
presence of the favourable ore-hosting formations and
approximately 90 per cent of the drill holes intersected
zones of sulphide, confirming the effectiveness of this
exploration method. Several of the holes did intersect narrow
widths of nickel-bearing sulphides. However, these
intersections, although encouraging, are not currently viewed as
having a high potential to represent an economic deposit.
Several target environments would require additional drilling
and two have not yet been drilled. No additional work is,
however, planned in these areas during 2004.

Underground exploration continued in 2003 at both
the Thompson and Birchtree mines at the Manitoba operations to
test for extensions to known deposits and to identify new
satellite deposits.

An advanced exploration program continued in the
1-D Lower ore body of the Thompson mine located below the
1,100-metre level. Drilling has provided more detail on the
shape of the deposit and the distribution of grades, and added
to the estimated ore reserves. In the third quarter of 2003, a
feasibility study was completed for a portion of the 1-D Lower
ore body between the 1,100-metre and 1,280-metre levels.
Estimated ore reserves in this area include 1.9 million
tonnes grading 2.2 per cent nickel of estimated proven ore
reserves and 2.9 million tonnes grading 2.2 per cent
nickel of estimated probable ore reserves. Initial ore from this
orebody is planed to be accessed during the first quarter of
2004.

During 2003, additional drilling was completed on
30 metre spaced sections that extend the 1-D lower ore body
to the south. The 1,068-metre level exploration drift was
subsequently extended 150 metres further south and drilling
continued late in the year. During 2003, a total of
13,698 metres of diamond drilling was carried out on the
1-D Lower ore body. Results from this work are being assessed
and drilling is expected to continue on the southern extension
of this ore body in 2004.

As discussed under Mining and
Production  General above, the Companys
Manitoba operations have been transitioning from the high-grade
Thompson mine, the principal source of ore for these operations,
to the lower-grade Birchtree mine. In 2003, work continued on
the two-year project to deepen Birchtree mine at the Manitoba
operations at a cost of $48 million, a project which is
expected to extend the life of this mine by at least
15 years.

A drilling program was continued at the Birchtree
mine in 2003 to test the down-dip extension of this mines
108 zone above the 840-metre level. A total of
9,045 metres of drilling was completed in 2003. Results are
being assessed and this program will continue in 2004, in
conjunction with ramp development from the 1,050-metre level.

Exploration continued during 2003 at the Mel
project, located 25 kilometres north of the City of
Thompson, under the terms of an agreement signed with Nuinsco
Resources Limited (Nuinsco), in August 1999. The
agreement grants Nuinsco the right to acquire the mineral lease
that covers the Mel deposit and 60 contiguous mining claims
by incurring aggregate expenditures of $6 million by
February 2006, subject to Incos right to buy back a
51 per cent interest in the deposit by spending the next
$6 million over a further four-year period. Under the terms
of this agreement, all production from any commercial quantities
of ore discovered would be delivered to Incos Thompson
facilities for processing on then prevailing market terms.
During 2003, Nuinsco funded a program of surface downhole
electromagnetic (DHEM) surveys and 987 metres
of diamond drilling over favourable environments identified by
Audio-magneto-tellurgic (AMT) surveys that were
carried out by the Company. Massive sulphide was intersected
that explains the DHEM anomalies but no significant nickel
mineralization has been encountered on the Mel claims to date.
Several DHEM conductors that are associated with the Pipe
Formation have not been tested and additional surface DHEM
surveys and diamond drilling are planned for the Mel project in
2004.

In 2003, exploration began at the TNB South
project that is centred approximately 100 kilometres
southwest of the City of Thompson. The property covered by this
program is contiguous with the southwest boundary of the

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Inco OIC Leases and extends 50 kilometres
further to the southwest. Canadian Royalties Inc., under the
terms of an agreement entered into with the Company in October
2003, has the right to earn a 50 per cent interest in the
property covered by the agreement by funding 100 per cent
of exploration expenditures, totalling $5 million over five
years. Inco has a right of first refusal on all production from
any commercial quantities of ore discovered. During 2003, line
cutting in preparation for a regional AMT survey began. In
addition to AMT surveys, surface DHEM and diamond drilling
programs are planned for 2004.


In 2003, field exploration apart from the
Companys producing mines and development projects focused
on Brazil, Australia, the United States, Canada and China. In
Turkey, the joint venture with Dowa Mining Co., Ltd. of Japan
was terminated by mutual consent and operations by Incos
subsidiary, Dardanel, were terminated and the Companys
exploration office in Ankara was closed.

In Brazil, a large-scale reconnaissance program
with Teck Cominco Limited continued to explore for copper-gold
and copper-zinc deposits. Incos Brazilian subsidiary
completed an exploration program on two copper-gold properties
in the northeastern Brazilian states of Ceará and Piaui. No
further work will be carried out on these properties. Canico
Resource Corp. (Canico) completed the initial phase
of a drilling and resource evaluation program on the Onça
Puma nickel laterite property in the Carajas district in Brazil
under agreements entered into in 2002 with the Company covering
this property. Canico acquired a 100 per cent ownership
interest in the property in February 2003 by raising
$22.5 million to complete a bankable feasibility study. As
part of the agreements covering this property, Inco
received initially a total equity interest, including warrants,
of approximately 18 per cent in Canico. As of
March 10, 2004, Incos interest in Canico was about
14 per cent as a result of dilution from financings by
Canico. Under the terms of a related offtake agreement, Inco has
the right to process and/or market all product from the
Onça Puma property. No fieldwork was carried out during
2003 in Peru, and the joint venture with Southwestern Resources
Corporation covering certain properties in Peru was terminated.

In Australia, three copper-gold prospects and
three lead-zinc prospects were drilled in collaboration with
PlatSearch NL. In March 2003, a memorandum of understanding was
signed with LionOre Australia Pty Ltd. whereby Inco would agree
to spend Aus $15 million over approximately a four year
period on exploration for nickel on certain tenements in Western
Australia. In the event of a discovery, Inco would earn the
right to participate in further exploration on the properties to
earn either an equity position in a major deposit or the right
to purchase the production from the deposit.

In Canada, Incos joint venture with Soquem
continued during 2003, following up targets identified by
airborne geophysical surveys flown by the Company over parts of
Québec. Two joint ventures with Aurora Platinum Corp. in
Northern Ontario continued in 2003 under which Aurora, using
historic Inco airborne geophysical data, conducted follow-up
exploration with Inco retaining a right to purchase any nickel,
copper, and platinum-group metal products produced from the
properties covered by these joint ventures, as well as the right
to buy back into any properties acquired or elect to take a
royalty. Inco entered into three new agreements in 2003 using
Incos historic airborne geophysical database. The
agreements are with Aurora Platinum Corp. covering the Abitibi
greenstone belt of Ontario and Québec, Canabrava Diamond
Corporation, covering the Winisk area of Northern Ontario, and
Freewest Resources Canada Inc., covering the Musketei River area
of Northern Ontario. Inco also completed a preliminary
exploration program consisting of ground geophysical surveys and
diamond drilling follow up on the Redstone nickel property which
is under option from Timmins Metal Corp. Inco has the right to
acquire a 70 per cent interest in the property.

Inco continued to actively evaluate exploration
projects in China during 2003. Exploration was initiated on the
areas covered by two cooperative joint venture agreements in
Jilin province, one with Jilin Nickel Industry Group Ltd. and
the other with Geological Survey Institute, Jilin Province, and
exploration is planned to continue under these agreements in
2004. Memoranda of understanding covering certain exploration
areas have also been signed in Yunnan and Sichuan provinces of
China and the Company has been evaluating other exploration
targets in China.

See Voiseys Bay Nickel Company
Limited  Voiseys Bay Deposit above for
information on exploration activities at the Voiseys Bay
project.

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All of the estimated ore reserves referred to in
this section are included in the table entitled Company-wide
estimated ore reserves under Ore Reserves and Mineral
Rights above.






| |                         
| | ------------------------
| | Research and Development

The Companys central research and
development facility, J. Roy Gordon Research Laboratory
(JRGRL), is located at Sheridan Park, Mississauga,
Ontario. JRGRL is operated by Inco Technical Services Limited, a
wholly-owned subsidiary of Inco Limited. In 2003, the Company
commissioned its hydrometallurgy miniplant for the Voiseys
Bay project in another building it acquired located in Sheridan
Park.

The Companys research and development
activities at JRGRL are organized into two groups, process
research and product research.

Inco believes that it is a nickel industry leader
in research and technology development. The Companys
research and development focus is closely aligned with its key
strategic objectives, including becoming the lowest-cost nickel
producer and increasing revenue from value-added nickel
products. The Companys major research and development
projects currently include the development of metallurgical and
environmental process improvements for existing operations,
hydrometallurgical process development work, as part of the
Hydromet R&D Program for the Voiseys Bay project, and
the development of proprietary value-added nickel products.
Research and development expenditures totalled $27 million
in 2003, principally due to increased spending on the Hydromet
R&D Program, compared with $17 million in 2002 and
$20 million in 2001.

Incos process research and technology
development work is conducted in partnership with operating
teams at the Companys operating locations and its major
project teams. These efforts are aimed at improving metals
recoveries and achieving cost reductions, as well as developing
opportunities for increased operating earnings through process
modifications. During 2003, the process research group continued
to assist in further improving the performance of the Clarabelle
Mill, the Copper Cliff smelter and the refineries at the
Companys Ontario operations. Further progress was made in
2003 towards improving smelter efficiencies through improved
flash furnace utilization and throughput and in developing
practical alternatives for the continued reduction of sulphur
dioxide emissions from the Copper Cliff smelter. The Company
also continued to work on the simplification of its processes
for the recovery of platinum-group metals, gold and silver in
order to lower operating costs.

At the Companys Manitoba operations, the
process research group continued to work with mill and smelter
personnel to address changes in ore composition that are
anticipated as a result of the increased production of ore from
Birchtree mine. As a result of this work, a new flotation
circuit was successfully commissioned at the Thompson mill in
2003, resulting in significantly improved rejection of rock
minerals without reducing nickel recoveries. In the future, the
resulting higher concentrate grades may allow smelting through
only one furnace at Thompson.

The process research group is also responsible
for developing new processes for the recovery of nickel, cobalt
and copper from the Goro and Voiseys Bay ores. During
2003, process research and process engineering personnel engaged
in a successful program to demonstrate the Voiseys Bay
milling process at the pilot plant scale and to continue the
development, as part of the Hydromet R&D Program, of a
hydrometallurgical process for Voiseys Bay nickel
concentrate at the miniplant level. High concentrate grades of
20 per cent nickel and above were consistently achieved
from the material from the Ovoid zone at approximately
90 per cent nickel recovery levels. Significant progress
was made at the hydrometallurgy miniplant to define the process
and the design parameters for the demonstration plant to be
built at Argentia, Newfoundland and Labrador beginning in 2004.
The new hydrometallurgy process is expected to produce nickel at
significantly lower capital and operating costs than
conventional smelting plus refining.

In the area of product research, Inco maintains a
highly-focussed research and development program, aimed at
creating new, proprietary value-added nickel products, as well
as new applications for existing products, and at providing
technical assistance to customers for these products. The
product research group works in close collaboration with Inco
Special Products, which has responsibility for all business
activities related to the Companys specialty nickel
products. Projects are led and conducted using cross-functional
teams. A stage-gate process is employed to evaluate the
technical and business success and opportunities.

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The rechargeable battery, powder-metallurgy,
electronic and other markets continue to grow and broaden into
diverse applications, creating new requirements for specialty
nickel products. To serve these rapidly evolving markets,
Incos product research group has been developing new
sintering nickel powders, extra-fine powders used in battery and
electronic applications and nickel foam and felts for battery
and fuel cell applications. During 2003, development of a fine
nickel powder suitable for applications in the powder metallurgy
industry continued. A new powder, tentatively called T110 PM,
was introduced to selected users. It has potential applications
in the press and sinter market, in diamond bonding, hard metals
and metal injection molding.

On the basis of experimental work conducted in
2001 and 2002, a pilot plant for development and production of
fine nickel powder for applications in multi-layer ceramic
capacitors was constructed at the companys Novamet
facilities in New Jersey. In addition to allowing the Company to
study parameters with respect to the production of these
powders, the pilot plant will enable the production of samples
for commercial testing and will support the Companys
possible commercial entry into this market.

The Company also operates a mines technology
department at its Ontario operations. This department carries on
projects in the areas of mines automation and mining methods and
mine design, including projects relating to backfill and rock
mechanics research. The mines technology department endeavors to
leverage its resources through participation research
consortiums with other mining companies.






| |                 
| | ----------------
| | Metals Recycling

Incos subsidiary, The International Metals
Reclamation Company, Inc. (Inmetco)(8),
located near Pittsburgh, Pennsylvania, is a world leader in
metals recycling. Using proprietary Inco technology, Inmetco
recycles nickel, chromium and iron from stainless steel mill and
metal finishing wastes and nickel and cadmium from spent
batteries.

Inmetcos net sales to customers, which are
included in Other in the table under
Sales above, were $35 million in 2003, compared
with $30 million in 2002 and $29 million in 2001.

Certain feedstocks and by-products of
Inmetcos process are regulated as hazardous or residual
wastes by the U.S. Environmental Protection Agency (the
EPA) and the Commonwealth of Pennsylvania. While
such regulation increases the demand for Inmetcos services
in some respects, it also increases Inmetcos operating
costs. The Company expects that in the years ahead the EPA and
the Commonwealth of Pennsylvania may issue a number of new
regulations that could impose additional costs on Inmetcos
operations, while other potential rules could reduce regulatory
burdens. The Company is not able to predict at this time the
effect that such additional regulations could have on its
operating costs and financial condition.






| |                                   
| | ----------------------------------
| | Environment, Health and
    Safety

The Companys operations are subject to
numerous environmental laws and regulations relating to, among
other things, air emissions, water discharges, soils, recycling
and waste management, decommissioning and reclamation, and
employee health and safety. While environmental requirements
vary considerably from country to country, future laws and
regulations may be expected to impose stricter environmental
requirements on the mining and metals processing industries in
general, and on specific uses of certain metals. The Company
devotes considerable resources to its performance under and
compliance with the environmental, health and safety laws and
regulations to which it is subject. However, the impact of
future laws and regulations in these areas on the Company cannot
be predicted with any degree of certainty.






| |              
| | -------------
| | SO2 Emissions





| |        
| | -------
| | Sudbury

Total sulphur dioxide
(SO2) emissions at the Companys
Ontario smelting operations were 169,000 tonnes in 2003, below
the current maximum SO2 emission limit of 265,000
tonnes which was established by the Government of Ontario in
1994. These emissions totalled 243,000 tonnes in 2002 and
232,000 tonnes in 2001.



---

|    |                
|--- | ---------------
|(8) | Inco trademark.

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The reduction in SO2 emissions in 2003
was due principally to the three-month strike at the
Companys Ontario operations referred to above.


In February 2002, the Ontario Ministry of the
Environment (the MOE) issued a control order (the
February 2002 Control Order) requiring reductions of
SO2 emissions at the Companys Ontario smelting
operations by 34 per cent, from the current limit of
265,000 tonnes to 175,000 tonnes annually, by the end of 2006,
and reducing the limit for SO2 ground level
concentrations (GLCs) by 32 per cent, from the
then current level of 0.50 parts per million (ppm)
to 0.34 ppm, effective April 1, 2002. GLCs refer to
the concentrations of SO2 at ground level after being
emitted from the emissions stack and forced to the ground by
atmospheric conditions rather than being dispersed. Fugitive
emissions, emissions which are caused when SO2 gases
exit the Companys operations through roof ventilation
equipment, windows, doors and other openings, are also
controlled under this order. During 2003 there were seven
exceedences of the new GLC limit  four from the stack
and three fugitive. This compares with three exceedences in
2002  two from the stack and one fugitive. The
Company is subject to possible regulatory action as a result of
these exceedences, but has not received any indication from the
MOE whether or not any charges will be laid. In order to
continue to meet the SO2 and GLC limits, it is likely
that the smelter will be operated at reduced capacity for brief
periods over the next few years when adverse meteorological
conditions, such as temperature inversion events or the absence
of wind, for plume dispersal exist.

In 2002, the Province of Ontario issued a
discussion paper covering proposals for further reductions in
SO2 emissions by non-ferrous smelting operations in
Ontario, including the Companys operations. The federal
government of Canada has also recently designated for further
regulation certain SO2 and particulate emissions from
copper-smelting operations such as those Inco has in Ontario. To
this end, the Canadian federal government has proposed, on an
informal basis, certain initiatives which would be applicable to
metals processing operations in Canada, including those of the
Company, that would have the effect of requiring operators such
as the Company to prepare and submit a plan outlining measures
to be taken to reduce these emissions to meet specified levels.
While the Company does not currently believe that these
initiatives will be put into effect, if they did come into
effect as proposed they would require the Company to commit to
material additional capital expenditures and/or significantly
reduce our production of nickel and certain other metals by as
early as 2008. While the Company is not able to determine the
effect, if any, of these recent developments and significant
changes in regulatory emission limits and other environmental
laws and regulations that may be enacted in the future due to
the uncertainty surrounding the timing and ultimate form that
such changes may take, any such changes could have a material
adverse effect on the Companys business, results of
operations, financial condition and liquidity.

The Company remains committed to further
reductions in SO2 and other emissions on a
cost-effective basis and will continue to evaluate and pursue
the development of technologies to meet these challenges, taking
into account cost-benefit considerations. While the Company is
not able to determine the effect, if any, of significant future
changes in regulatory emission limits beyond the February 2002
Control Order and other environmental laws and regulations that
may be enacted in the future on its results of operations or
financial condition due to the uncertainty surrounding the
timing and ultimate form that such changes may take, any such
changes could have a material adverse effect on the
Companys business, results of operations, financial
condition and liquidity.

During 2002, the Company began a $90 million
investment project covering fluid bed roaster (FBR)
off-gas scrubbing technology intended to reduce
SO2 emissions to the new levels under the
February 2002 Control Order to be effective by the end of 2006.
This FBR project is also expected to have the added benefit of
decreasing total metal emissions of nickel, copper, arsenic and
lead by 80 to 100 tonnes per year. The FBR project involves the
installation of water scrubbers that clean the SO2
gases by removing, principally, particulate matter. The
SO2 gases are then directed to the acid plant to be
converted into sulphuric acid. The FBR project will also provide
the Company with the ability to treat the same types of gases
coming from certain other smelting furnaces. As part of the
February 2002 Control Order, the Company has agreed to continue
its research into the technology and economics of further
SO2 and total metals reductions, and report to the
MOE and the public on the progress of this research program. The
February 2002 Control Order also calls for a final report by the
Company on how further SO2 and total metals
reductions could be achieved to be submitted to the MOE by
December 31, 2010. The February 2002 Control Order expires
on December 31, 2012. In 2003, as part of the FBR project,
Inco commenced construction of the weak acid treatment plant.
This plant, which will be

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operational in 2004, will receive the scrubbed
metals from the SO2 gases and will fix the arsenic
compound that can be placed into the tailings area. This will
result in a 10 tonne per year reduction in arsenic emissions
from the stack.


Canada signed and ratified the Kyoto Protocol to
the United Nations Framework Convention on Climate Change (the
Kyoto Protocol) in December 2002. The Kyoto Protocol
calls for significant reductions in emissions of greenhouse
gases, such as carbon dioxide, and nationwide ceilings on such
emissions. In November 2002, the Canadian federal government
released an initiative, the Climate Change Plan for
Canada, which includes specific requirements to also limit
the discharge of carbon dioxide and other greenhouse gases. As
of early March 2004, neither the Kyoto Protocol nor this
initiative has established what the allocation of reductions
among various sources of greenhouse gases would be. While the
precise impact on the Companys Canadian operations and the
operations of others who provide energy or other products or
services to the Company is uncertain at this time, the Company
anticipates that compliance with these initiatives could have a
significant adverse effect on its business, results of
operations and cash flows.






| |         
| | --------
| | Thompson

The Companys Thompson, Manitoba smelter
operated during 2003 under a regulation issued by the Manitoba
government which limits emissions of SO2 from the
Companys Manitoba ores to 23,000 tonnes per month and
220,000 tonnes per calendar year. Inco met both of these limits
during 2003, with the total of such emissions at 191,000 tonnes
for the year. These emissions totalled 210,000 tonnes in 2002
and 217,000 tonnes in 2001.






| |                                
| | -------------------------------
| | Port Colborne and Sudbury Soils

The Company has been working with regulatory
authorities and other interested parties to evaluate elevated
levels of nickel and other metals in soils located in the
vicinity of the Companys processing facilities in Sudbury
and Port Colborne, Ontario that may have been affected by the
historical emission of windblown metal-containing particulates.
The Company believes that the Ontario government guidelines (the
MOE Remediation Guidelines) for the remediation of
metals in soils which were issued by the MOE in 1996 do not
satisfactorily account for the importance of metal speciation
(the different chemical substances and forms in which metals
occur), which controls the ability of metals in soils to cause
potential toxic effects. In 1998, the Company submitted a
generic risk assessment of nickel in surface soils to the MOE.
This study, which was authored by recognized experts, concluded
that potential toxicity of nickel in soils to certain sensitive
plant species was the only health or ecological risk resulting
from the range of nickel concentrations expected in generic
soils, and that risks to other organisms, including wildlife,
grazing animals and humans, were negligible. The study indicated
that soil acidity, and the related nickel ion bioavailability,
was the principal factor controlling toxicity. Research on
sensitive plant species funded by the Company subsequent to this
generic assessment confirmed that adjusting soil acidity was
both a practical and an effective solution to removing the toxic
effects of elevated nickel concentrations in the soil to
sensitive plants.






| |              
| | -------------
| | Port Colborne

In 1998, the Company began discussions with the
City of Port Colborne and the MOE concerning certain metals
found in the surface soils downwind of the Companys Port
Colborne refinery. MOE soil sampling results released in January
2000 indicated a wide area having surficial soils with levels of
nickel, copper and cobalt above the generic levels established
by the MOE for phytotoxicity. Based upon these results, the
Company suggested that a community based risk assessment
(CBRA) process, funded by the Company, would
represent a more objective, fair and efficient way of assessing
any risks from these levels than conducting numerous
site-specific risk assessments. The CBRA process was accepted by
the MOE and the City of Port Colborne and in April 2000 the Port
Colborne city council appointed a seven-member Public Liaison
Committee (the PLC), consisting of local citizens,
to interface and work with the Company and its consultants on
the CBRA process. A stakeholder technical sub-committee was also
formed consisting of representatives of the MOE, the Regional
Public Health Department, the City of Port Colborne, Inco and
consultants. In November 2000, the scope of work for the CBRA
process was agreed upon and work commenced. The CBRA process has
focussed on ecological

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and human health assessments involving all
potential pathways for exposure to specified metals for all
living species and all health endpoints.


In 2001, the CBRA evaluated soil analyses to
determine if there existed any additional inorganic or organic
chemicals of concern (CoCs) related to Incos
historical operations. The only additional CoC found beyond
nickel, copper and cobalt and potentially linked to Incos
operations was arsenic, which was added to the three existing
CoCs for all health and environmental assessments within the
CBRA process. The testing carried out on soils in the vicinity
of the refinery showed lead levels higher than generic levels
established by the MOE, but completely within the range found in
older communities throughout North America caused principally by
societal use of lead-based paints and leaded gasoline until the
mid-1970s and the improper disposal of lead-acid automobile
batteries. Even though the Port Colborne refinery emitted some
lead-containing particulates during its approximately
80 years of operation, an inventory of such emissions,
together with air dispersion modeling, has shown that expected
soil lead concentrations from such emissions are a tiny fraction
of the lead observed in soil. A comprehensive report on lead as
a CoC within the CBRA was written in 2003 and is currently being
peer reviewed. This report confirms that the Company should not
be held responsible for the lead found in soils in Port Colborne.

During preliminary discussions on the CBRA in
2000 with the MOE and the PLC, some residents expressed concerns
about health risks to children attending schools and playing in
school yards during dust-generating activities such as plowing
and cultivation in agricultural fields adjacent to the schools.
In response to these concerns, the Company retained consultants
to conduct air sampling campaigns during periods when no field
activities were being conducted and also during periods when
tractor and plowing work was being conducted in preparation for
the planting of crops. Results from these studies were released
in late 2000, showing very low total nickel, copper, cobalt and
arsenic levels in dusts collected at the schools. These levels
were far below the Ontario ambient air standards for these
elements.

The objective of the CBRA is to assess human and
environmental health risks from multi-pathway exposures to CoCs
in Port Colborne. If risks are found to exist at unacceptable
levels, as defined by governmental authorities, then the CBRA
will also recommend options for the remediation of soils to
remove those risks. As a result of this effort, the CBRA will be
able to derive Port Colborne-specific soil concentrations for
each CoC that will not be a risk for environmental and human
receptors in the community and all soil types and uses occurring
in the community. Significant progress was made in 2003 with the
completion of two draft reports, one on the natural environment
and the second on commercial crops. Both of these reports have
undergone extensive review by the consulting company hired to
assist the PLC and by external independent peer reviewers.
Revisions to these draft reports in response to the reviews are
expected to be tabled in mid-2004. After appropriate public
consultation, the final reports are expected to be sent to the
MOE for its approval at the end of 2004. A third report
concerning human health risks was drafted in 2003. It has not
yet been peer reviewed, but submission of the report in final
form is expected in 2004. While the results of the CBRA have not
yet been finalized, based on the information available to date,
it appears that a relatively small area of land in Port Colborne
could require remediation. While it is not possible to predict
the exact area of such land or the cost of any required
remediation at this time, the Company believes that, to the
extent that remediation is required, adding limestone to the
soils to adjust soil acidity may represent a cost-effective
solution.

In late March 2001, two developments occurred in
connection with the historic operations of Incos refinery
in Port Colborne, Ontario: (i) the filing of a purported
class action proceeding in an Ontario court and (ii) the
release of a report by the MOE covering elevated levels of
nickel and other metals found in the soils at depth (below five
centimetres) on 16 out of nearly 180 properties sampled by
the MOE in Port Colborne (the March 2001 MOE Report)
and the issuance of a draft remediation order by the MOE.

The purported class action proceeding originally
filed against Inco and several other parties under Ontario class
action proceedings legislation claimed Cdn.$600 million in
compensatory damages and Cdn.$150 million in punitive
damages covering certain residents who lived in the Port
Colborne area since 1995 and allegedly suffered a decline in
their property values as a result of, and health and other
injuries from exposure to, metals and related emissions from the
refinery. In June 2002, hearings were held in the Ontario
Superior Court of Justice to consider whether this action, or
any portion of it, should be certified to proceed as a class
action. In July 2002 the court

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rejected certifying any part of the action as a
class action. The plaintiff appealed this decision and the
appeal, which revised the original pleadings and focused on the
plaintiffs claim for damages for property value diminution
only, resulting in a significant reduction in the number of
citizens that the plaintiff is purporting to represent, was
heard in June 2003. In early February 2004, the Ontario
Divisional Court rejected the plaintiffs appeal. Soon
after this decision was released, the plaintiff sought leave to
appeal to the Ontario Court of Appeal. We expect to know whether
or not the court will grant leave (that is, permission) to the
plaintiff to appeal to the Court of Appeal by the end of May
2004.


With respect to the issue of the finding of
nickel, in particular nickel oxide as the primary form, at
various depths in the Port Colborne soils adjacent to the Port
Colborne refinery, the March 2001 MOE Report established an
intervention level of 10,000 ppm or more of nickel as a
potential health risk and soil samples taken by the MOE
reflected nickel concentrations above this level on
16 properties. While the Company did not accept the March
2001 MOE Reports findings and conclusions, in response to
the report it proposed a voluntary remediation program for the
16 properties whereby the Company offered to remove and
replace the soil on these properties to bring them below the
10,000 ppm level.

In April 2001, the Company submitted a detailed
comment letter to the MOE on the March 2001 MOE Report. Based
upon such key issues as what the exposure pathways would be and
the level of exposure from nickel oxide and other forms of
nickel found in the soils at depth, the Company did not believe
that the levels of nickel found as reported in the March 2001
MOE Report represented a health hazard. In May 2001, the MOE
indicated that, given the comments it had received on the March
2001 MOE Report from the Company and others, it would
effectively be withdrawing the report and draft order and would
be undertaking further studies and analyses. A revised draft
report was issued for public comment by the MOE in late October
2001 together with a new draft order which would have required
that 25 properties, based upon the soil sampling by the MOE
reflected in the March 2001 MOE Report, be remediated given a
slightly lower intervention level for nickel, 8,000 ppm,
established by the MOE in its revised report. The Company
submitted a new comment letter to the revised report and revised
draft order in late November 2001. In March 2002, the MOE
released its report and order in final form. It contained a
somewhat different methodology for calculating health risks for
certain pathways, but retained 8,000 ppm nickel in soils at
depth as the intervention level, and the MOE issued a broad
order to Inco to remediate properties having soil nickel levels
above that level and undertake certain other activities (the
March 2002 Order). Inco did not believe the
intervention level of 8,000 ppm nickel in soils at depth
was supported by the scientific information available and
believed that the March 2002 Order imposed a number of other
remediation and sampling obligations that were not supported by
the findings in the March 2002 report.

The Company kept its voluntary remediation
program open for the original 16 properties and extended
its voluntary offer to the additional nine properties identified
by the MOE as having in excess of 8,000 ppm nickel in soil
(the 25 properties). Only five property owners
have chosen to participate in the Companys voluntary
remediation program to have the Company remove and replace the
soil on their properties. We have been advised that the owners
of the remaining 20 properties (except one property which
the Company owns) are represented by the same counsel that
represents the plaintiff in the class action proceeding referred
to above.

In April 2002, Inco appealed the March 2002
Order. A group of citizens also appealed the March 2002 Order,
asserting that the Order was too lenient. The appeals were heard
by the Ontario environmental review tribunal (the
Tribunal), starting with preliminary sessions in
November 2002. On the first day of the preliminary hearing,
motions were made by both appellants regarding the scope of the
hearings. Inco moved that the appeal should deal only with human
health risk associated with systemic nickel intake, which was
the basis of the March 2002 Order. The citizens group, on
the other hand, indicated that the hearings should consider all
environmental endpoints and also respiratory cancer. The review
tribunal accepted the Companys motion to limit the scope
of the appeal to issues arising from the March 2002 Order only.
Counsel for the citizens group appealed this decision by
way of a judicial review, which was heard in March 2003. The
judicial review concluded that the tribunal was correct to limit
the scope of its hearings and the hearings resumed in September
2003. As a result of the Company receiving clarification from
the MOE on the scope of its 2002 Order, and with the agreement
of the citizens group to withdraw its appeal, the Company
withdrew its appeal and the Order was re-instated with an expiry
of December 2004. In September 2003, representatives of the
Company and the MOE

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visited all properties that had not been
remediated under the Companys voluntary program to discuss
the proposed remediation of each property. In October 2003, the
Company submitted a remediation plan to the MOE and to all but
one of the property owners. A remediation plan for the one
remaining property is expected to be submitted to the MOE and to
this property owner by the end of March 2004. Comments were
received from the affected property owners and the Company
responded by revising its remediation plan and filing it with
the MOE in early December 2003. As of December 30, 2003 the
Company was notified by the MOE that the revised plan was
acceptable. Removal and replacement of soil on these properties
is expected to occur when the ground becomes workable in the
spring of 2004.


In late January 2004, we received notice that the
affected residents were making an application for leave to
appeal the MOEs acceptance of our revised remediation plan
to the Tribunal. The Tribunal has asked the residents to provide
submissions as to whether the Tribunal has jurisdiction to
consider the application for leave to appeal before it will
consider the leave application.

In April 2001, in response to the draft order
accompanying the March 2001 MOE Report, the Company voluntarily
undertook additional sampling in residential areas adjacent to
the area where the 25 properties are located. Based upon
this additional sampling by the Company, no additional
properties were found to require remediation.

As part of the CBRA process, the Company agreed
to carry out a special health survey of Port Colborne residents,
to be conducted by a team of medical experts, to determine if
adverse health effects linked to CoCs in the soils are currently
being experienced by people in the community. The Company
retained Ventana Clinical Research Corporation
(Ventana) to conduct this work. During 2001, Ventana
interviewed citizens in the community and medical professionals
and presented a conceptual scope of work in October 2001. This
scope of work was reviewed, revised and prioritized by the
stakeholders during 2002. The scope of work contemplated the
following four studies: (i) a population health survey to
identify if there is a higher prevalence of any particular
disease in residents of Port Colborne compared to residents of
comparable communities (Study A), (ii) if
determined necessary by the results of Study A, an
epidemiological case control study on any diseases found in
Study A to determine if the diseases are linked to exposure to
CoCs (Study B), (iii) a study of the incidence
of hospital admissions relative to a comparative community
(Study C), and (iv) a study of the
incidence of cancer rates using national and provincial
databases (Study D). Work began on Study A
in December 2002 and a draft report is expected by the spring of
2004. Study C, which compares the incidence of hospital
admissions in Port Colborne with data from similar communities
in Ontario, was completed in 2003. The draft report on the
findings of Study C is currently undergoing Company and
peer review. Study D remains in the planning stage. Once
Study A and Study C have been completed, whether or not
Study B is necessary will be reviewed. We cannot predict
with any certainty whether Study B will be necessary. If it
is undertaken, it is currently expected that it would start in
2005.

At the beginning of the CBRA process in 2000, the
Company also agreed to undertake a study on the socio-economic
impacts that the CoCs in soils may have or may be causing.
Efforts to draft an appropriate scope for such a study have been
unsuccessful and it is not known at the present time if such a
study will ultimately be conducted by the Company.

Given the existence of various legal appeals and
scientific and medical studies currently underway, it is
impossible to predict the effect that these actions and studies
could have on the Companys business, results of operations
and financial condition.






| |        
| | -------
| | Sudbury

In September 2001, the MOE released a report
indicating that it had analyzed soil samples collected within
the Sudbury area for various substances, including arsenic and
certain other metals. This report stated that nickel, copper,
cobalt and arsenic in some soil samples were in excess of the
applicable MOE guidelines and that the elevated concentrations
of these metals in the soils were attributable to the history of
nickel-copper mining and smelting in the area by Inco and
Falconbridge. The two companies agreed to jointly fund risk
assessments for human and environmental health in the Sudbury
region. They have also joined the MOE in extending soil sampling
to areas that were undersampled.

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The Sudbury area soil data in the MOEs
report showed nickel concentrations lower than those found in
Port Colborne soils, but the potential area affected in Sudbury
is larger than in Port Colborne. Some of the work being
conducted at Port Colborne will be applicable to Sudbury, but
the risk assessment for Sudbury must be based on the specific
soil types located there. During 2001, the City of Greater
Sudbury, the Regional Health Department, the MOE, Inco and
Falconbridge formed a technical committee (the Sudbury
Technical Committee), with Health Canada participating on
behalf of First Nations communities, to guide the risk
assessment work on nickel, copper, cobalt and arsenic in soils
and other related environmental media. This was followed by the
formation by the Sudbury Technical Committee of a public
advisory committee consisting of ten citizens and the
appointment of a process observer responsible for reviewing the
timeliness, effectiveness and transparency of the risk
assessment process.

In 2002, the Sudbury Technical Committee defined
the scope of work for the human health and environmental health
risk assessments, issued a comprehensive request for proposals
to carry out the assessment, reviewed six proposals submitted
and chose the winning bid based on technical, economic and
public communication criteria. The risk assessments will be
carried out by the Sudbury area risk assessment group
(SARA), a consortium of firms having the collective
experience necessary to conduct this multi-disciplinary project.
The consortium includes a number of environmental management and
analytical firms. Work was started under a preliminary contract
in December 2002 and the final contract was signed by Inco and
Falconbridge in 2003.

Extensive public consultation was carried out in
2003 and will continue throughout the risk assessment process.
Analysis of several thousand new soil samples was completed by
SARA and two additional elements, selenium and lead, were added
to the list of CoCs for the community. The scope of work for the
environmental risk assessment was tabled in September 2003 and
is currently undergoing review by peers. The scope of work for
the human health risk assessment is in preliminary draft form.
Both of these scopes of work are expected to be completed in
mid-2004. Ambient air monitoring was initiated in October 2003
and preliminary garden vegetable sampling was conducted in the
summer of 2003. The risk assessments are scheduled to be
completed by mid-2005. Incos share of the cost of the work
is about $2 million. It is impossible to predict what
remediation may be recommended from these assessments, but it is
well known that the Sudbury area has undergone successful
re-greening efforts over the last several decades and has
experienced a significant ecological recovery.






| |                                
| | -------------------------------
| | Decommissioning and Reclamation

Inco is committed to decommissioning its
facilities, at both existing and inactive mine sites, in an
environmentally sound manner commonly referred to as
progressive decommissioning. In Ontario, progressive
decommissioning is ongoing at the Copper Cliff tailings area
where exposed tailings are being covered. In 2003, the Company
continued to maintain more than 1,500 hectares of vegetated
cover on inactive tailings for stabilization purposes. In 2003,
the Company continued its decommissioning and reclamation
projects at both operating and non-operating properties in
Ontario including demolition and closure work at Shebandowan,
Crean Hill and Frood-Stobie mines and the Port Colborne
Refinery, recontouring at Whistle Mine, tree planting and
groundwater assessment. In Manitoba, the Company submitted
reclamation plans for the Thompson mine and processing
facilities to the Manitoba government. Reference is also made to
Future Removal and Site Restoration; Closure and
Post-Closure Plans below.






| |                      
| | ---------------------
| | Revegetation Programs

A significant part of the Companys
environmental programs in both Canada and Indonesia involves the
revegetation of mined-out lands and areas affected by mining and
processing activities to return them to a natural state.

In 2003, Inco continued to produce seedlings at
its underground nursery in Creighton Mine. The nursery is
located at a depth of more than one kilometre, where temperature
and humidity are constant. Automated watering and lighting
systems optimize the growth of seedlings year-round.
Approximately 200,000 seedlings were grown, of which 142,000
were planted in the Sudbury region, in 2003. The remainder of
the seedlings were donated to the City of Sudbury and various
community groups.

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At PT Inco in Indonesia, reclamation efforts
continue to focus on returning to mined out areas the waste rock
and soil that was removed to access the ore and planting trees
in these areas. The objective of this program is to maintain the
size of the mine footprint to a maximum of 650 hectares and
restore mined out areas to their natural state.






| |        
| | -------
| | PT Inco

PT Incos operations are subject to
environmental regulations and permits issued by the Government
of Indonesia. PT Inco is in compliance with these permits
except for the release of soluble nickel, manganese and
occasionally chromium in its liquid effluent discharges into a
small stream adjacent to its operations and the levels of
emissions of particulates from its facilities. In recent years,
PT Inco has implemented a number of projects which have
reduced the levels of nickel, manganese and chromium in its
effluent discharges and is continuing its efforts to bring these
levels within the regulated limits. By dredging, PT Inco
has been able to increase the retention capacity of its sediment
ponds and nickel concentrations in effluent were in compliance
for 2003. Since 2000, PT Inco has also had a program in
place with the government for investigating the most effective
way to further reduce its particulate emissions. This program
includes an action plan and periodic reporting to the
government. PT Inco also initiated a dust handling program
in 1999 to address issues associated with various dust handling
processes at PT Inco. This program includes the
installation of equipment, in particular additional
electrostatic precipitators (ESPs), and other
solutions to reduce dust emissions. The principal sources of
dust emissions and other particulate emissions from
PT Incos facilities are PT Incos dryers,
reduction kilns, converters and electric furnaces. A new ESP was
constructed and commissioned on one of PT Incos three
dryers in 2001 and operated in 2002, so that all of
PT Incos dryers had installed ESPs. This investment
has resulted in a substantial decrease in dust from this source
and PT Inco is now in compliance with permitted dust
emissions levels from its dryers. Modifications to the ducting
to one of PT Incos five kilns has resulted in
decreased dust emissions and this effort will be extended to the
other two similar kilns. Two newer kilns are equipped with ESPs
and operate at low dust emissions, below permitted levels. By
the third quarter of 2003, all five kilns at PT Inco were
approaching compliance with permitted dust emission levels.
PT Inco has also installed an automated pneumatic dust
handling system which collects and transports dusts for
reprocessing and standby blowpot systems have been installed on
four of PT Incos kilns to allow maintenance to be
performed without interrupting the control and collection of
dust. The fifth kiln was constructed with standby blowpot
capacity, so all five kilns now have this standby capacity. An
audit of the blowpot systems is being prepared and it is
expected that the audit will recommend further improvements to
enhance their performance and reduce fugitive emissions.
PT Incos three converters are in compliance with
permitted dust emission levels. The principal remaining sources
of dust emissions are PT Incos four furnaces and
PT Inco and an independent engineering firm are continuing
to study options for cleaning the furnace off-gases with a pilot
test program scheduled for late 2004 or early 2005. Workplace
dust issues are also being addressed to improve workplace
quality. During 2003, a number of significant improvements were
realized as part of PT Incos overall dust handling
program, including a modification of the dust collection system
of the kilns to allow for increased dust capture. While
PT Inco (i) has kept the relevant governmental
authorities apprised of those situations where it has not been
in compliance with certain emission limits as noted above,
(ii) has been working with these governmental authorities
in respect of such regulatory issues and (iii) has not
received any indication from such governmental authorities that
it would be subject to any penalties or sanctions for such
exceedences, PT Inco may still be subject to regulatory
actions by such governmental authorities for non-compliance with
certain emission limits.






| |                                                                        
| | -----------------------------------------------------------------------
| | Future Removal and Site Restoration; Closure
    and Post-Closure Plans

The following includes information that appears
in Managements Discussion and Analysis of
Financial Condition and Results of Operations under
Item 7 of this Report and in Notes 1 and 13 to
the financial statements under Item 8 of this Report.

The operations of the Company have been, and may
in the future be, affected from time to time in varying degrees
by changes in environmental laws and regulations, including
those for future removal and site restoration costs. Both the
likelihood of future regulations and their overall effect upon
the Company vary greatly from

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country to country and are not predictable. The
Companys policy is to meet or, if possible, surpass
environmental standards set by relevant legislation, by the
application of technically proven and economically feasible
measures. Environmental expenditures that relate to ongoing
environmental and reclamation programs are charged to earnings
as incurred or capitalized and depreciated depending on their
future economic benefits. Estimated future removal and site
restoration costs are charged to earnings on a straight-line
basis over the estimated remaining life of the related business
operation. Actual removal and site restoration expenditures are
charged to the related liability.


The estimation of future removal and site
restoration costs depends on the development of environmentally
acceptable closure and post-closure plans, which, in some cases,
may require significant research and development to identify
preferred methods which are economically sound and which, in
many cases, may not be implemented for several decades. The
Company has continued to utilize appropriate technical
resources, including outside consultants, to develop specific
site closure and post-closure plans in accordance with the
requirements of the various jurisdictions within which it
operates. Typical closure and progressive rehabilitation
activities include, where applicable, demolition of buildings,
removal of underground equipment, sealing of mine openings,
treatment to reduce or prevent acid generation from stockpiled
waste materials such as tailings, general clean-up activities
aimed at returning the area to an environmentally acceptable
condition, and post-closure care and maintenance.

In accordance with environmental regulations
adopted by the Province of Ontario in 1991, the Company
developed rehabilitation and site restoration plans associated
with the eventual closure of its operations in that province.
The Company filed three closure plans by the end of 1997, having
previously received approval from the Province of Ontario for
the consolidation of its operating mines and properties in that
province into 15 sites for purposes of closure plans, and the
remaining 12 closure plans were filed by the end of 1998. As a
result of provincial regulatory changes which became effective
in 2000, the plans were refiled to meet these changes in 2001.
The Company believes that cost-effective tailings disposal
alternatives exist within the ongoing operating activities of
its Ontario operations which would limit site restoration at
closure to a care and maintenance activity, thus significantly
reducing the costs of such site restoration. Under such
environmental regulations, Inco is required to provide, and has
provided, letters of credit for three closed properties in
Ontario (Whistle mine, Shebandowan mine and Crean Hill mine) in
the amount of $21 million as at December 31, 2003.

In accordance with environmental regulations
adopted by the Province of Manitoba in 1999, the Company has
submitted reclamation and closure plans for all its facilities
in the province. The Company submitted two reclamation plans for
its mines and processing facilities in Manitoba in 2000, two
plans in 2001 and the remaining two plans were submitted in
2003. These reclamation and closure plans have been accepted by
the Government of Manitoba.

Closure plans for the proposed mine and mill
facilities were prepared and submitted to the environmental
assessment panel in 1998 in connection with the environmental
review process of the Companys Voiseys Bay project
in the Province of Newfoundland and Labrador. A draft closure
plan was submitted to the provincial authorities in September
2002 and was reviewed and accepted as part of the application
for a mining lease for this project. Closure plans for the Goro
mining area were prepared and submitted in January 2002 to the
Government of the South Province of New Caledonia in connection
with the operating permits application (installation
classée application).

The Company follows a policy of progressive
rehabilitation at its Indonesian operations whereby land
disturbed by mining activities is revegetated on an ongoing
basis. In 2003, a closure plan was developed for
PT Incos operations which will be finalized in 2004.

Inco developed a draft closure plan for its
Exmibal facility in Guatemala during 2003. This plan is
expected to be completed by mid-2004.

In the United Kingdom, the Companys
operations at Clydach and Acton have each submitted closure
plans to the relevant governmental authorities as a part of the
resubmission of their operating authorizations and as required
under new legislation arising from the EU Integrated Pollution
Prevention and Control directive.

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In the United States, a closure plan has been
prepared for Inmetco and site characterization studies for
closure plans are in the process of being prepared for Novamet.

Substantial removal and site restoration costs
are incurred on an ongoing basis with the objective of
significantly reducing future removal and site restoration costs
that may otherwise be incurred following the closure of any
sites. This progressive rehabilitation includes tailings
management, land reclamation and revegetation programs,
decommissioning and demolition of plants and buildings, and
waste management activities. Operating costs associated with
ongoing environmental and reclamation programs, including
progressive rehabilitation, totalled $39 million in 2003,
$13 million in 2002 and $12 million in 2001 and are
included in cost of sales and operating expenses. Capital
expenditures on environmental projects totalled $28 million
in 2003, $9 million in 2002 and $17 million in 2001.
The Company currently anticipates that capital expenditures on
environmental control and related projects in 2004 will be
approximately $60 million.

Although the ultimate amount to be incurred is
uncertain, the total liability for future removal and site
restoration costs in respect of the Companys worldwide
operations, to be incurred primarily after cessation of
operations, is estimated to be approximately $141 million
at December 31, 2003, based upon certain discount rates and
timing with respect to when these costs would be expected to be
incurred applied in accordance with the new accounting standard
that the Company has adopted, compared with $119 million at
December 31, 2002 and $121 million at
December 31, 2001. Effective January 1, 2003, we
adopted a new accounting standard of the Canadian Institute of
Chartered Accountants relating to asset retirement obligations.
This standard significantly changed the method of accounting for
future removal and site restoration costs and prior period
consolidated financial statements have been restated to reflect
this change. The comparative figures for 2002 and 2001 are
significantly below previously reported figures due to this
change in accounting method which has been applied
retroactively. Under this new standard, the liability is
accreted over time through periodic charges to earnings. The
charge for 2003 was $9 million. In addition, the asset
retirement cost is capitalized as part of the asset carrying
value and depreciated over the assets useful life. The
estimate of the total liability for future removal and site
restoration costs has been developed from independent
environmental studies, which include an evaluation of, among
other factors, currently available information with respect to
closure plans and closure alternatives, the anticipated method
and extent of site restoration using current costs and existing
technology, and compliance required by presently enacted laws,
regulations and existing industry standards. The total liability
for future removal and site restoration costs represents
estimated expenditures associated with closure, progressive
rehabilitation and post-closure care and maintenance. Potential
recoveries of funds from the future sale of assets upon the
ultimate closure of operations have not been reflected in the
estimate of the total liability or related annual provision.
Future changes, if any, to the estimated total liability, as a
result of amended requirements, laws, regulations and operating
assumptions may be significant and would be recognized
prospectively as a change in accounting estimate, when
applicable. Environmental laws and regulations are continually
evolving in all areas in which we operate.

Changes made in 2000 to mining regulations in the
Province of Ontario require the Company to provide letters of
credit or other forms of financial security to fund the
Companys future reclamation and restoration costs, which
are not expected to be incurred for many years, in certain
circumstances such as if the Company were to no longer meet
certain minimum investment-grade credit ratings for its
outstanding publicly traded debt securities and based upon
applicable mine life requirements. Although the Companys
debt securities are currently rated investment grade, they were
rated below investment grade in recent times and there can be no
assurance that this situation will not reoccur. If the Company
were not able to maintain the minimum investment-grade credit
ratings, it is currently estimated that letters of credit or
other forms of financial security associated with the currently
estimated costs of the eventual future closure of our mines and
other facilities in Ontario would have to cover a significant
portion of such closure costs. Due to the closure of three mines
in Ontario, in 2002 we were required under such mining
regulations to provide letters of credit in the amount of
$21 million to secure these near-term closure costs as
discussed above. In addition, PT Inco is subject to certain
Indonesian regulations which require it to provide security for
the reclamation of land areas that have been mined. In the case
of the Companys Manitoba operations, in 2003 we submitted
closure and reclamation plans for all our operations in that
province. We expect that, based upon regulations in the Province
of Manitoba, we will be required to provide some form of
financial security for our future reclamation and restoration
costs in that province. However, it is

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not currently expected that these costs and
related security with respect to the Companys Manitoba
operations, beyond what has been included in the
$141 million estimated total liability as at
December 31, 2003 referred to above, and for
PT Incos operations and/or such financial security to
be provided for our Manitoba operations will be of a material
amount. These potential costs might not be incurred until many
years in the future. If these requirements for letters of credit
or other forms of financial security had to be satisfied, they
could have an adverse effect on the amounts available for
borrowing under the Companys credit facilities.


In view of the uncertainties concerning
environmental remediation, the ultimate cost of future removal
and site restoration to the Company could differ from the
estimated amounts provided. The estimate of the total liability
for future removal and site restoration costs is subject to
change based on amendments to laws and regulations and as new
information concerning the Companys operations becomes
available. Future changes, if any, to the estimated total
liability, as a result of amended requirements, laws,
regulations and operating assumptions may be significant and
would be recognized prospectively as a change in accounting
estimate, when applicable. Environmental laws and regulations
are continually evolving in all areas in which the Company
operates. The Company is not able to determine the
impact, if any, of environmental laws and regulations that may
be enacted in the future on its financial position due to the
uncertainty surrounding the ultimate form that such future laws
and regulations may take.






| |                  
| | -----------------
| | Health and Safety

The health and safety of the Companys
employees are of the highest priority. The prevention of
workplace accidents and illnesses is a major goal of the
Company. Safety training and educational programs for workers
have continued to be enhanced at all of the Companys
operations and, through international workshops, sponsored
university research and other activities, the Company is a
leader in efforts to determine how to better test and assess the
impact of metal compounds on humans and ecosystems.






| |                      
| | ---------------------
| | MITE Research Network

The Company is one of the major contributors to
the Metals in the Environment (MITE) research
network initiative in Canada sponsored, in part, by the Mining
Association of Canada. This five-year program, which will
conclude in 2004, includes studies on (i) the relative
importance between natural and human sources of metals placed in
the environment, (ii) the processes that control the
ultimate disposition of metals from whatever source, and
(iii) the effects, both beneficial and harmful, that metals
and metal compounds have on aquatic and terrestrial organisms.
The results from this program are already affecting the course
of regulatory activity relating to metals throughout the world.
Data generated will assist in carrying out necessary risk
assessments and in determining risk management strategies for
the continued safe use of the Companys processes and
products.

The MITE program has succeeded in bringing
together research scientists and government policy makers to
cooperatively decide where science is needed in policy
development in Canada and to review how the current results from
the MITE initiative can be applied. For example, research
symposia to discuss the results of the program were held in
Ottawa in February 2002 and February 2003. The MITE network has
placed two post-doctoral associates, one at Environment Canada
and the other at EVS Environmental Consultants Ltd. of
Vancouver, to assist in bringing the programs research
results into practice in risk assessments and, where applicable,
into governmental programs, policies, guidelines and
regulations. A major workshop involving government, industry and
academia was held in May 2003 to review the current status of
research worldwide and to identify remaining knowledge gaps.
This workshop resulted in a proposal being put forth for the
establishment of a new network of Canadian researchers with a
major focus on risk assessment of metals as they pertain to
health. Application for principal funding for this proposed new
network is being made through the Canadian Natural Sciences and
Engineering Research Council.






| |                          
| | -------------------------
| | Diesel Particulate Matter

In 1995, the American Conference of Governmental
Industrial Hygienists (ACGIH) announced its
intention to establish for the first time a Threshold Limit
Value (TLV) for diesel particulate matter
(DPM) of 0.15 mg/m3. This proposed TLV,
based primarily on rat and mice studies, constituted nearly a
seven-fold

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reduction from the current Canadian target level
of 1.0 mg/m3 DPM. If adopted by regulatory
authorities in Canada, this would require substantial changes in
the Companys use of diesel equipment in its underground
operations since this equipment emits DPM. The Company responded
to the proposed TLV by making written and oral presentations to
the ACGIH in 1996, noting that toxicological and epidemiological
studies on health effects of DPM have given inconsistent and
unreliable results and that it would, accordingly, be impossible
to set scientifically sound occupational exposure limits for
DPM. For a discussion of TLVs, see Regulation of Nickel
and Other Nonferrous Metals  Occupational Exposure
Limits (OELs) in Canada below.


The ACGIH did not take any action to adopt the
TLV in 1997 or 1998. However, in 1999 the ACGIH announced that
it intended to further reduce the proposed TLV to 0.05
mg/m3 for DPM of less than one micrometre in
diameter. In 2001, it lowered this proposed TLV even further, to
0.02 mg/m3, analyzed as elemental carbon. In 2003, however, the
ACGIH removed the proposed TLV for DPM from its Notice of
Intended Change list and placed it on the list of Chemical
Substances and Other Issues Under Study, where it remains
for the year 2004. It is not known whether the TLV as proposed
in 2001 (or some modification thereof) will be placed on the
Notice of Intended Change list again in the future.

The U.S. Mine Safety and Health
Administration (the MSHA) initiated a rulemaking
activity in 1998 to establish a regulatory exposure limit for
DPM in underground mines in the United States. Action of this
kind by MSHA is usually considered significant as Canadian
provincial governments often consider taking similar action.
After a period of extensive public comment, the MSHA adopted its
new exposure limit in late 2000 of 0.4 mg/m3 DPM,
determined using the total carbon technique. The new MSHA rule
provided an 18-month phase-in period for companies to achieve
compliance, at which point the new limit would apply for a
period of five years, after which it would be reduced to 0.16
mg/m3. It is not known whether, when or how Canadian
provincial governments will respond with similar limits, but an
ad hoc group of governmental and mining industry personnel
(including personnel from the Company) was formed in late 2000
to discuss this subject.

Recognizing the importance of regulatory
Occupational Exposure Limits (OELs) for DPM on the
Companys operations in Ontario and Manitoba, as discussed
under Regulation of Nickel and Other Nonferrous
Metals  Occupational Exposure Limits (OELs) in
Canada below, the Company helped form in 1997 an
industry-labour-government research consortium, the Diesel
Emissions Evaluation Program (DEEP), to determine
sampling and analytical techniques capable of measuring low
levels of DPM and to evaluate techniques capable of controlling
DPM emissions in workplace air. DEEP has investigated a number
of research areas, in particular biodiesel, fuels, maintenance
improvements, and the effect of light duty vehicles on DPM in
underground mines. In 2000, DEEP extended its original
three-year term to allow completion of field tests on
particulate filters, which potentially hold the most promise for
cost-effective control of DPM. Several of these underground
tests began at Incos Stobie mine in 2001 and continued
throughout 2002 and 2003 as long periods of testing are required
to determine the expected lifetime of the filters under real
operating conditions. These tests indicate that certain filters
provide exceptional service, while others fail in some diesel
applications. The ultimate choice of which filter will work on
which engine is a matter of closely matching the engines
operating parameters with those of the filters. Developing this
algorithm for filter selection is the main focus of DEEP as it
aims to conclude its work in 2004. Adoption by the Company of
ultimate DPM control strategies developed by DEEP, and the cost
of such adoption, will depend on a number of factors, including
the types of engines used and their duty cycles as well as the
final regulatory limit the Company will be required to meet.






| |                                   
| | ----------------------------------
| | WSIB Occupational Disease Policies

The Company is subject to workers
compensation laws in various jurisdictions pursuant to which
occupational injuries to, and diseases of, individual workers
making claims are examined and payments are awarded by a
governmental board or agency. The expense of such awards is
generally funded by the employer, typically as a percentage of
payroll costs within the jurisdiction of the relevant board or
agency, and is adjusted according to the experience with such
claims either with respect to employees of the particular
employer alone or on the basis of all claims in respect of
employees in the same industry within the relevant jurisdiction.

In 1994, the Occupational Disease Panel (the
ODP) of the Ontario Ministry of Labour (the
MOL) concluded that there was a probable
connection between miners lung cancer and all
hardrock mining. In 1996,

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the ODP asserted that a 1996 cancer morbidity
study conducted by researchers at McMaster University, using a
large group of Ontario male nickel production workers from Inco
and Falconbridge, confirmed such a connection for nickel miners.
Consequently, the ODP recommended that primary lung cancer and
the occupation of hardrock mining be categorized under a
particular schedule of the Ontario Workers Compensation
Act which would create a presumption in favour of a causal
relationship for lung cancer claims unless the contrary could be
proven. In 1997, the ODP issued another report dealing
specifically with laryngeal cancer and workers in nickel
production. This report relied heavily on the 1996 McMaster
University study referred to above. The ODP recommended that
laryngeal cancer and certain nickel producing occupations be
treated in the same manner as lung cancer and hardrock mining.
The Company retained independent medical and epidemiological
specialists to analyze these assertions and, as a result, made
several submissions to the Workplace Safety and Insurance Board
(the WSIB), the regulatory body of the MOL
responsible for evaluating and adjudicating workplace injuries
and diseases, taking exception to the ODP recommendations,
primarily on the basis that tobacco smoking is likely a
confounding factor, and to the validity of the findings of both
the original hardrock mining report and the McMaster University
study. These submissions explained why the Company believed that
the ODP report was flawed and suggested that no policies on this
matter be established until more methodologically sound studies
were conducted. Similar submissions have been made by
Falconbridge and by the Ontario Mining Association. Because of
these submissions, the WSIB has not taken any action on any of
the ODP reports.


In late 1994 the WSIB also revised and extended
its policy with respect to lung cancer compensation claims by
nickel smelter and refinery workers. Inco objected to the
process that was used in considering the revised policy, which,
in the Companys opinion, failed to take into account
applicable scientific data, and also objected to flaws in the
policy itself. As a result of submissions to, and discussions
with, WSIB staff, in early 1998 the WSIB proposed a revision to
the 1994 policy. However, this revision failed to address the
Companys central concerns with the policy and the Company
made additional written submissions to the WSIB suggesting
further significant revisions. The Company has continued its
efforts to have the WSIB change this policy, but no changes have
been forthcoming. In mid-2001, the Company was invited to join a
special stakeholder panel being formed by the WSIB. This panel,
called the Occupational Disease Advisory Panel (the
ODAP), consisted of industry and labour
representatives from a broad range of industrial sectors. The
ODAPs mandate was to advise the WSIB of criteria that
should be applied in developing policies, to review contentious
policies that currently exist, and to recommend how the WSIB
should deal with controversial studies previously conducted by
the ODP. During 2003, it became apparent that the ODAP could not
reach consensus on a number of important issues and that a
report from the ODAP was not possible. Instead, the ODAP Chair,
who had been selected and assigned this position by the WSIB,
drafted a report which attempted to relate areas of agreement
and disagreement of the ODAPs members. The draft was
provided to ODAP members for comment in December 2003. It is
expected that the Chairs report will be delivered to the
WSIB in 2004, but the Company cannot predict what actions WSIB
will take as a result of this work.






| |              
| | -------------
| | Worker Safety

The table below shows the disabling injury
frequency (DIF) for the Company in 2003, 2002 and
2001:

|    |  |      |     |      |  |      |     |  |  |  |     | 
|--- |  | ---- | --- | ---- |  | ---- | --- |  |  |  | --- | 
|    |  | 2003 |     | 2002 |  | 2001
|    |  |      |     |      |  |     
|DIF |  |      | 1.7 |      |  |      | 1.8 |  |  |  | 1.8 | 

The DIF is calculated by the Company by
multiplying the total number of disabling injuries in a year
that employees incurred as a result of work-related injuries by
200,000 hours (which is a constant used by the Mine and
Aggregates Safety and Health Association (Ontario) and other
similar organizations) and then dividing that product by the
total number of hours worked by employees during that year. The
DIF disclosed above for 2002 is different from the previously
disclosed DIF for 2002 because the DIF for 2002 has been
recalculated to reflect information that the Company received
subsequent to the previous disclosed DIF for 2002.

In 2001, the Company developed a safety
management framework which outlines measures to be taken by all
employees to ensure that every employee works as safely as
possible. Since that time, each of the Companys operations
and subsidiaries has developed and implemented, or is currently
developing, a facility-specific plan to implement the safety
management framework.

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In 2003, Stobie mine at the Companys
Ontario operations was awarded the Ryan Award for
Safety for its performance during the previous year. This
award is presented to the mine in Ontario with the lowest
lost-time injury frequency and no fatalities which has operated
for at least 500,000 hours.






| |                                                     
| | ----------------------------------------------------
| | Regulation of Nickel and Other Nonferrous
    Metals

Regulatory and non-governmental agencies in the
United States, Canada and Europe have proposed and, in certain
instances, adopted regulations and other standards relating to
environmental releases of nickel, exposure to nickel in various
forms, and management of nickel-containing wastes, as summarized
below.






| |                                                  
| | -------------------------------------------------
| | Occupational Exposure Limits (OELs) in
    Canada

The ACGIH evaluates toxicological data and
establishes a chemicals TLV, an airborne concentration to
which nearly all workers can be exposed for eight hours per day
for five days per week for their entire working life without
suffering adverse health effects. Although the ACGIH has no
regulatory power, TLVs are commonly used as starting points for
setting mandatory standards for exposure to certain materials by
regulatory authorities throughout the world. In November 1997,
the ACGIH Board of Directors approved new TLVs and carcinogen
classifications for nickel and its compounds. These
classifications were published as adopted values in
1998. The new TLVs, which are to be measured as nickel in
inhalable particulate, were as follows:
1.5 mg/m3 for elemental/ metallic nickel;
0.2 mg/m3 for insoluble nickel compounds; and
0.1 mg/m3 for soluble nickel compounds and
nickel subsulphide (which forms during the metallurgical
processing of the Companys nickel ores). The TLV for
nickel carbonyl was unchanged at 0.05 ppm. Since 1998,
insoluble nickel compounds and nickel subsulphide have been
classified by ACGIH as Confirmed Human Carcinogens;
soluble nickel compounds have been designated Not
Classifiable as a Human Carcinogen; and elemental nickel
has been classified as Not Suspected as a Human
Carcinogen. Nickel carbonyl was not classified for
carcinogenicity at all.

The Province of Manitoba automatically adopts the
ACGIHs TLVs as mandatory OELs and it adopted the TLVs
for nickel as OELs in 1998. Between 1998 and 2002, the
Companys Manitoba operations continued to use established
sampling technology because routine samplers for inhalable
particulate were not available. However, all samples collected
during this period were converted to an inhalable basis using
relevant research results. Also during this period, an
analytical protocol developed by Inco for determining soluble
nickel, oxidic nickel, sulfidic nickel and elemental nickel
contents was used to determine the concentrations of nickel in
samples for the four types of nickel substances specified in the
OEL. In 2002, sampling for types of nickel in the workplace was
completed using an inhalable IOM 7-hole sampling system and
analyzed for nickel species using the Inco-developed analytical
protocol. As the analytical protocol cannot uniquely distinguish
nickel subsulfide from other nickel sulfide, additional
assumptions about the presence of various sulfides must be made
using knowledge about the processes being used from which dust
arises. As predicted, few groups of workers were found to exceed
the OELs. Action plans were implemented to mitigate such
exposures in the surface processing plants. The success of these
action plans was evident by a significantly reduced number of
individuals having exposures exceeding the OELs in 2003.

The Province of Ontario does not automatically
adopt the ACGIHs TLVs and the MOL normally consults
stakeholders prior to setting OELs. In the case of nickel, these
discussions started in 1999. By mid-2000 the MOL had stated that
it intended to adopt OELs for only two of the four ACGIH nickel
TLVs, nickel subsulfide and insoluble nickel. The proposed OELs
were numerically equivalent to the TLVs, but were based on a
so-called total dust sampler, currently used
extensively in Ontario, instead of an inhalable dust sampler.
However, when the final regulation was published in September
2000, the MOL chose to adopt all four of the ACGIH nickel TLVs
as new inhalable OELs. While the Companys Ontario
operations would have had relatively minor compliance problems
under total dust sampling, significant problems
existed for inhalable sampling and inhalable OELs, principally
in the smelter, matte crushing and matte separation plants.

In March 2001, a tripartite committee focusing on
the review of inhalable levels of nickel, made up of
representatives of the MOL, the Company and several locals of
the union that represents the Companys workers, was formed
by the MOL to cooperatively review and consult on several new
commercial products for inhalable

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sampling which became available in 2001. A viable
commercial sampler was found to be workable in the
Companys workplace environments in May 2001. In October
2002, the tripartite committee concluded its work with an
agreement that the analytical technique that Inco adopted for
speciation, in conjunction with other analytical techniques
necessary to identify the species, all of which would be subject
to the professional judgment of an expert in the field prior to
acceptance, was a reasonable approach for characterizing OELs
for metallic nickel, insoluble nickel, soluble nickel and nickel
sub-sulfide in Inco workplaces. To meet these OELs, a four-year
workplace environment improvement plan has been developed by the
Company and reviewed with the MOL. Approximately $5 million
was committed in 2002 for ventilation improvements to be made
over the next few years. In 2003, approximately
$1.6 million was spent on ventilation improvements which
resulted in decreases in airborne exposures. For example, in
2003 the matte processing area of the Copper Cliff Smelter,
total nickel levels decreased by 25 per cent to
88 per cent. It is not possible to state at this time
the full extent of the ventilation improvement program or the
total capital expenditures that will be necessary to comply with
these OELs at the Companys Ontario operations. The Company
and the MOL have agreed in principle to a long-term cooperative
approach of engineering control upgrades that will take place in
a number of workplaces over several years to meet these OELs.


In 2001, the MOL released a discussion paper
concerning a proposed permanent process for up-dating OELs for
all workplace substances. Four options for this process were
proposed by the MOL, which invited comments on these options
from stakeholders. The Company joined other members of the
Ontario Mining Association in forming a task force aimed at
considering the best process for maintaining OELs that are
protective of workers, supported by sound science, and
economically practical. The task force released its comments in
February 2002. In the opinion of the task force, none of the
options suggested by the MOL was acceptable and it suggested a
fifth option in which an independent expert advisory group would
review each candidate OEL for its scientific, as well as
practical, basis. There was no response from the MOL on this
proposed option in 2003. The Company cannot predict the effect
that further reductions in OELs for workplace substances could
have on its operations or financial condition.






| |                                                                 
| | ----------------------------------------------------------------
| | Occupational Exposure Limits (OELs) in the
    U.S. and the U.K.

The Company is generally in compliance with the
permissible exposure limits for all forms of nickel that are
currently applied by the U.S. and U.K. governments.






| |                                          
| | -----------------------------------------
| | U.S. Environmental Regulatory
    Actions

In 1990, the United States Congress amended the
U.S. Clean Air Act to require, among other things, that 189
chemicals or chemical groups (including nickel compounds) be
regulated as hazardous air pollutants (HAPs).
Pursuant to this legislation, the EPA has been promulgating
stringent technology-based standards for controlling emissions
of HAPs from designated source categories. This process will
continue in the future and ultimately may include the
promulgation of additional risk-based standards. Some of these
standards may limit emissions of nickel and its compounds, most
likely through limits on overall emissions of particulate
matter. The Company is unable to determine what nickel-emitting
sources may ultimately be covered by such standards or to
predict what capital expenditures or operating cost increases
the Company or its customers may incur as a result of the
promulgation of such hazardous air pollutant standards.

In July 1999, the EPA issued its final Integrated
Urban Air Toxics Strategy under which 33 HAPs judged to pose the
greatest threat to public health in urban areas are to be
targeted for future regulation. Nickel compounds were among the
33 HAPs listed under this strategy. As a result, nickel
compounds will be included by the EPA in periodic National Air
Toxics Assessments (NATAs) designed to estimate and
track trends in emissions, ambient air concentrations,
population exposures, and associated characterizations of risk.
In June 2002, the EPA released the Final National-Scale Air
Toxics Assessment for 1996 (NATA-1996), which
estimates emissions, ambient air concentrations, and population
exposures for the 33 HAPs referred to above based on a 1996
emissions inventory, and characterizes the resulting population
risks on a national and regional basis. This assessment
reflected much lower total national emissions of nickel
compounds than an earlier estimate that was based on information
for 1990. NATA-1996 found that concentrations of nickel
compounds in the ambient air were not of concern with respect to
non-cancer health effects. However, nickel compounds were
characterized as

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being a more significant contributor to potential
cancer risks. That finding was based on what the Company and
other nickel producers believe to be a flawed methodology for
estimating potential cancer risk. The nickel industry has made a
submission to the EPA, asking that the methodology be corrected,
so that a more appropriate risk characterization can be made in
the next release of NATA information, which is scheduled at
three-year intervals. In addition to issuing NATAs, the
EPAs Urban Air Toxics Strategy will target various sources
of hazardous air pollutants for further emissions reductions. In
the case of nickel compounds, some of these sources are likely
to be fossil fuel combustion units, while others may involve
nickel-using industries such as stainless steel manufacturing
and metal plating. The Company is unable to predict what impact,
if any, the inclusion of nickel compounds on the EPAs list
of Urban Air Toxics and related assessments might have on nickel
users and, indirectly, on the Companys operations or
financial condition.


In December 2002, the National Toxicology Program
(NTP) within the U.S. Department of Health and
Human Services released its Tenth Report on Carcinogens
(ROC). In these bi-annual reports, NTP lists various
substances that it concludes are either known to be human
carcinogens or reasonably anticipated to be human
carcinogens. Previous versions of the ROC listed metallic
nickel and certain nickel compounds as
reasonably anticipated to be human carcinogens.
Metallic nickel remained in that category in the Tenth ROC.
However, nickel compounds as a class (with no
differentiation) were listed as known to be human
carcinogens. That broad listing runs counter to arguments
that Inco and other nickel producers had made to NTP over the
years, and the Company continues to believe it is not
scientifically justified for various types of nickel compounds.
Since nickel compounds already had been characterized as
carcinogenic to humans by the International Agency for Research
on Cancer, it is not clear what additional impact, if any,
NTPs listing of nickel compounds as known to be
human carcinogens in the Tenth ROC will have on businesses
that produce, use, handle, or otherwise manage nickel compounds
and wastes in which they are contained. Similarly, since
metallic nickel has been listed as reasonably anticipated
to be a human carcinogen by the NTP for many years, it is
not clear what effect, if any, the reaffirmation of that listing
in the Tenth ROC will have. Nickel alloys, stainless steels and
other alloys that contain nickel, also were evaluated for
possible listing in the Tenth ROC, but after all the evidence
was considered, they were not included as either
reasonably anticipated or known to be
human carcinogens. Following publication of the Tenth ROC, the
Company in conjunction with nickel producer associations,
formally requested that NTP correct certain information in the
Tenth ROC regarding nickel metal and nickel compounds. That
request was rejected late in 2003. An appeal of that rejection
is pending.

In December 2002, the EPA adopted sweeping
amendments to its Inventory Update Rule (IUR
Amendments) implementing provisions of the
U.S. Toxic Substances Control Act. The IUR program
requires manufacturers and importers of covered chemical
substances to submit quadrennial reports of specified
information if they produce or import more than a designated
amount of a covered chemical at any one site. Prior to the
adoption of the IUR Amendments, inorganic chemical substances
(like nickel and its compounds) had been exempt from IUR
reporting. The IUR Amendments removed that exemption so that
inorganic chemicals will be subject to the IUR program in the
next reporting cycle, covering calendar year 2005. While the
basic reporting threshold has been increased from 10,000 pounds
per site to 25,000 pounds per site, the information required to
be reported has been dramatically expanded, particularly for
sites that produce or import more than 300,000 pounds of a
covered chemical during the reporting year. The new processing
and use information required in those cases will be burdensome
to collect and report; however, this expanded requirement to
report processing and use information will not apply to
inorganic chemicals like nickel until the 2010 reporting year.
While the new IUR reporting requirements will impose additional
costs and burdens on the Company and various of its
U.S. customers, they are not expected to have a material
adverse effect on the Companys operations or financial
condition.






| |                                          
| | -----------------------------------------
| | Canadian Environmental Protection
    Act

In 1994, under the Canadian Environmental
Protection Act (CEPA), two federal government
departments, Environment Canada and Health Canada, published
toxicity assessments of 17 substances, including nickel and its
compounds. The assessment concluded that metallic nickel was not
considered toxic under CEPA. However, oxidic, sulphidic and
soluble compounds of nickel were considered toxic, according to
statutory definitions and criteria. As a result of this
assessment, together with CEPA toxic classifications for
mercury, lead, and certain

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compounds of arsenic and cadmium, a base metal
smelter Strategic Options Process (SOP) was
conducted in 1997 with the result that the industrial sector
committed to develop site-specific environmental management
plans and reduce sector-wide releases of arsenic, cadmium, lead,
mercury and nickel by 80 per cent from 1988 (as the
base year) to 2008.


In 1999, a revised CEPA was enacted and has been
viewed as granting increased authority to, and mandating
increased attention by, federal departments in data collection,
pollution prevention and other regulatory actions. As a result
of the revised CEPA, Environment Canada has initiated several
additional programs. One has been to review the progress being
made under the original base metal smelter commitments made as
part of the SOP and possibly accelerating their implementation.
Another program has been to take action regarding substances
known to be toxic under CEPA, including emissions of dioxins and
furans, sulphur dioxide and particulate matter. The Company is
part of the industry group interacting with Environment Canada
on these programs. During 2003, this group examined the options
for regulations that might be employed under CEPA to control
substances listed as toxic. Presently, pollution prevention
plans and a code of practice for base metal smelters are under
active debate at a multi-stakeholder level, with a view to using
this as the basis for the regulation of toxic substances under
CEPA.

Another CEPA-related program seeks to categorize
and prioritize all substances on the Domestic Substances List
(the DSL), a list of more than 20,000 substances
which are permitted to be produced in or imported into Canada.
New substances that are not on the list are required to undergo
a pre-manufacturing appraisal in order to be added to the list.
Environment Canada has elected to apply criteria for this
process that the Company believes are inappropriate for
inorganic substances. These criteria were originally developed
for synthetic organic chemicals and involve assessments of
persistence, bioaccumulation and toxicity. In 2001, an expert
advisory group, including a consultant representing the Mining
Association of Canada, was organized by Environment Canada for
the purpose of reviewing the scientific validity of using
persistent, bioaccumulative and toxic (PBT) criteria
for inorganic substances. In late 2001, this group issued its
findings and recommendation to Environment Canada. This group
concluded that the persistent, bioaccumulative criteria do not
properly categorize metals and other inorganic substances.
However, recognizing that the use of PBT criteria is legislated,
the group recommended that all inorganic substances should be
considered as persistent for the purposes of this
categorization, and that toxicity alone should be
the criterion by which inorganic substances should be
categorized. In June 2002, Health Canada made a proposal for
categorizing human exposure to substances on the DSL on the
basis of use and on the basis of industry codes originally
attached to substances when they were placed on the list.
Discussions on this proposal continued through 2003 and the
Company cannot at this time identify or predict what additional
operating or capital expenditures will be required by the
Company to meet the ultimate regulations that may result from
these and other possible CEPA-based and Environment Canada
programs.






| |                              
| | -----------------------------
| | California Regulatory Actions

In 1991, the California Air Resources Board
(CARB) identified nickel and its compounds as a
toxic air contaminant. A series of guidelines were then issued
for assessing risks of non-occupational exposure, and acute and
chronic reference exposure levels (RELs) were
proposed along with a cancer potency factor for nickel
compounds. Because the Company and other nickel producers
believed that the guidelines and RELs were not well-founded
scientifically and might lead to unjustifiable controls being
placed on users of nickel in California and elsewhere, Inco and
other nickel producers made submissions criticizing the methods
used by the CARB in developing the RELs. In February 2000,
California adopted final RELs. Although the final RELs represent
an improvement over the initial proposals, the Company believes
they are still unjustifiably low. Although the RELs do not
appear to have had a significant impact on nickel users in
California, the Company is unable to predict at this time what
long-term impact the RELs will have in California or,
indirectly, in other jurisdictions in which nickel is produced
or used.

In June 2003, the California Office of
Environmental Health Hazard Assessment proposed a Child-Specific
Reference Dose (CSRD) for nickel to be used in
school site risk assessments. Nickel producer associations of
which the Company is a member submitted comments questioning the
scientific basis for the proposed CSRD and arguing that it
should be at least five times higher. The California Office of
Environmental Health Hazard

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Assessment has not yet taken final action on the
proposal, which is awaiting external peer review. However, the
Company does not believe that the CSRD, even if adopted as
proposed, would have a material adverse impact on its operations
or financial condition.


Late in 1999, the California Office of
Environmental Health Hazard Assessment proposed a public health
goal (PHG) of one microgram of nickel per litre of
drinking water. In conjunction with other nickel producers, Inco
submitted comments arguing that this proposal was scientifically
unjustified. In August 2001, a final PHG of 12 micrograms
of nickel per litre of drinking water was adopted by the
California authorities. Although not itself a mandatory
standard, this goal presumably will serve as a benchmark for
setting a drinking water standard in California. This goal could
also affect the perception of the health risks associated with
nickel by producers and users of nickel-containing products. In
addition, this PHG may have an impact on the EPAs
consideration of a future drinking water standard for nickel or
on the drinking water guideline values for nickel being
developed or reviewed by the World Health Organization, as
discussed below, or by other bodies.






| |                          
| | -------------------------
| | Right-to-Know Legislation

Right-to-Know and other reporting
laws have been adopted in many jurisdictions in which the
Company operates. These laws generally require employers to
advise their workers and their local communities, as well as
specified governmental authorities, of the kinds and amounts of
specified chemicals, including some chemicals made or used by
the Company, which may be present in the workplace, released to
the environment, or sent to a recycling or waste management
unit, and to develop emergency response programs. Compliance
with these Right-to-Know requirements has had no
material effect on the Companys financial position or
operations.






| |                                                              
| | -------------------------------------------------------------
| | Harmonization of Classification and Labeling
    of Chemicals

In 1990, the International Labour Organization
(the ILO) initiated a project to harmonize existing
systems for the classification and labeling of chemicals. This
goal was endorsed by the 1992 UN Conference on Environment and
Development (UNCED) and was included as one of the
six areas for action identified in Chapter 19 of
Agenda 21 of UNCED on the environmentally sound management
of toxic chemicals. UNCED recommended that a globally harmonized
hazard classification and compatible labeling system, including
material safety data sheets (MSDSs) and easily
understandable symbols, should be available, if feasible, by the
year 2000. In September 2001, a Harmonized Integrated Hazard
Classification System for Chemical Substances and Mixtures was
approved by the ILOs Task Force on Harmonization of
Classification and Labeling and endorsed by the OECDs
Joint Meeting of the Chemicals Committee and Working Party on
Chemicals, Pesticides and Biotechnology. This document and
similar documents on Physical Hazard Classification and Hazard
Communication Tools were merged to form the Globally Harmonized
System (GHS). The GHS was adopted by the UN
Subcommittee of Experts on the GHS on the Classification and
Labelling of Chemicals and the UN Committee of Experts on
the Transport of Dangerous Goods and the GHS in December 2002.
The GHS system is now ready for adoption by individual countries.

Although adoption of the GHS continues to be
considered voluntary, the goal of the Intergovernmental Forum on
Chemical Safety, endorsed at the September 2002 World Summit on
Sustainable Development is to have as many countries as possible
implement the GHS by 2008. As well, Asia-Pacific Economic
Cooperation (APEC) is recommending the GHS be adopted, on a
voluntary basis, by 2006, and Australia has committed to
adopting the GHS by 2006. The countries that are signatories to
the North American Free Trade Agreement (Canada, the United
States and Mexico) have committed to review their internal
systems and consider adopting the GHS. Canada is expecting
adoption by 2008. The Company does not believe that the adoption
of the GHS will have a material impact on its results of
operations or financial condition.






| |                       
| | ----------------------
| | European Union Actions

There are several key areas under discussion at
the European Commission concerning nickel in respect of
workplace legislation, public health and consumer product
legislation, and environmental legislation. In 2003 ten new
member states were invited to join the European Union
(EU) as of May 1, 2004. There will be a
re-election of members to the European Parliament in each member
state in June 2004. It is not known what impact

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these changes to the EU membership may have on
the EU legislative process, but we believe that there will be
changes in the area of policy development as a result of the
increase in EU membership.


In policy terms, the single biggest development
during 2003 was the adoption by the European Commission in late
October 2003 of the draft legislative text of a new chemical
policy (the NCP) for the EU that will supersede some
30 pieces of current EU legislation. The legislation, which
still must be debated and approved by the European Parliament
and adopted by the European Council before it can take effect,
is not expected to come into force before 2006 at the earliest.
The new policy, referred to as REACH (for
registration, evaluation, and authorization of chemicals), would
place more responsibility on companies to register, test and
secure regulatory approval as a condition for producing or
importing chemicals in the EU. The registration and evaluation
requirements would be triggered by the tonnage of certain
substances produced in or imported into the EU. In addition,
authorizations would be required for chemicals of high concern,
including those which are classified as category 1 or 2
carcinogens, mutagens, or reproductive toxicants and those
classified as PBT in the environment. In effect, the REACH
system would require producers/ importers of such chemicals to
obtain a permit to market them based on their use patterns. It
is unknown whether the European Parliament will approve the
REACH program as adopted by the European Commission or if
amendments will be tabled. As approved by the European
Commission, REACH applies to ores, concentrates and
intermediates of the mining and metals industries, while
exempting comparable materials from the organic compound product
chain. It also applies to massive forms of metals and their
alloys, which typically are viewed as less hazardous to human
health and the environment. The concerns of the metals industry
are being tabled through a metals forum group made up of
Eurometaux (the non-ferrous metals producers association in the
EU), Eurofer (the iron and steel producers association in the
EU), and Euroalliage (the alloys producers association in the
EU). A socio-economic study, looking at business consequences of
the proposed NCP, is under way to assess its potential impact on
these sectors. Industry may incur significant costs for
administration and implementation, as well as research funding
if the NCP is adopted in its present form.

EU Regulation 793/93(EEC), the so-called
existing substances regulation, is concerned with
the evaluation of the risks of and controls for existing
substances. Five nickel substances are listed for review under
this regulation. The Company believes that this is the single
most comprehensive legislative review of nickel in respect of
human health, public health, consumer health and the environment
that has been undertaken by a governmental authority worldwide.
This legally driven initiative started in 1996, when Denmark,
allegedly concerned about the ability of nickel to cause dermal
sensitization, placed elemental nickel and nickel sulphate on
the third priority substances list developed by the European
Commission. In 1996, the Danish Environmental Protection Agency
(the DEPA) was appointed the principal agency for
conducting risk assessments on these substances. In 2000, three
additional nickel compounds, nickel carbonate, nickel chloride
and nickel dinitrate, were added to the risk assessment program
as part of another priority substances list developed by the
European Commission.

These nickel risk assessments have progressed
slowly due, in part, to the rapidly changing methodologies for
assessing environmental risks of metals in general. The nickel
industry has been successful in demonstrating that further
research and testing is required for a scientifically credible
environmental risk assessment of nickel. A formal research
program has been agreed with the European Commission for this
work, the details of which will be finalized in early 2004, with
an anticipated completion date of early 2005. At that stage, the
technical debate on safe levels of nickel in all of the
environmental compartments (soils, water and sediment) will
resume.

In the area of health risk assessment, the
classification of soluble nickel compounds has been referred to
the specialized experts group (the SEG) of the
European Commissions working group on classification,
which is a subgroup of experts of the cancer, mutagenicity and
reproductive toxicity classification group. The proposal has
been made by the DEPA that all soluble nickel compounds are
category 1 carcinogens, i.e. known human carcinogens.
Currently, soluble nickel compounds are classified as category 3
carcinogens, which is a much less toxic classification. The
evidence to support this classification is being reviewed in the
context of the classification criteria of the EU. The nickel
industry will be allowed to present scientific information on
nickel to the SEG in April 2004.

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Further research and testing on mutagenicity has
been mandated for nickel compounds. Mutagenicity is closely
related to carcinogenic potential (genotoxic or non-genotoxic
mode of action) and helps determine safe levels of nickel
exposure. A research proposal has been developed by the nickel
industry. This proposal is being reviewed by a technical group
of experts and is expected to be agreed on by the technical
meeting on risk assessment in March 2004. The research is
expected to be completed in 2005.

Soluble nickel compounds have been proposed as
category 2 reproductive toxicants under the EU classification
system. This proposal is expected to be confirmed at the
European Commission classification group meeting in 2004. Such a
classification will mean that soluble nickel compounds will be
subject to authorization under the REACH program described
above. Nickel metal has been proposed as a category 3
reproductive toxicant and respiratory sensitizer. The issue also
will be discussed by the classification committee in 2004.

In August 2003, the DEPA released its first draft
report concerning risk characterization of the nickel compounds
as part of the risk assessment process. This draft report is
being reviewed by industry and member states experts and is
expected to be revised in late 2004, when further discussions
are planned. It is anticipated that the OELs for both metallic
nickel and soluble nickel compounds may be lowered as a result
of new information in this report. The data to support the
proposal to lower nickel OELs are also being reviewed by the
European Commissions scientific committee on occupational
exposure limits (SCOEL), which has been considering
nickel occupational exposure limits for several years. A draft
criteria document on occupational exposure limits for nickel was
presented to SCOEL in 1997. That document is now being revised.
The revised version is expected to be made available to SCOEL in
the spring of 2004. New science based OELs for nickel may be
recommended.

At this time it is not known what impact these
risk assessments and OEL reviews will have on the Companys
operations or those of its customers. Recognition is given in
the draft risk characterization report to the need for
pragmatism, that is, to consider economic and technical
feasibility data to be provided by the nickel industry. Further
studies on dermal exposure in workplaces have also been
suggested as part of the draft risk characterization report. The
European nickel group risk assessment team, to which Company
personnel belong, is working closely with the European
Commission and the DEPA on the nickel risk assessments.

The European Commissions Air Quality
Directive is concerned with controlling certain substances in
ambient air (nickel, cadmium, arsenic and polyaromatic
hydrocarbons). The Directive includes proposed limit values for
nickel of 20 nanograms per cubic metre. Control measures
proposed for nickel producers and users disregard the fact that
the nickel industry is a minor contributor to nickel in ambient
air while fossil fuel combustion is the greatest source. It also
ignores the fact that point source control of nickel emissions
will likely go beyond what is technically feasible under the
existing EU Integrated Pollution Prevention Control Directive,
which applies to all industrial installations in the EU, even
using the best available technology. Moreover, the limit values
proposed have no techniques for standardized measurement. The
metals industry position, developed by Eurometaux and others, is
that the proposed Directive is impractical. Discussions continue
at the European Parliament level, and it is unknown what the
final outcome will be.

The European Commissions Water Framework
Directive, which regulates water quality standards in the EU,
listed nickel as one of the priority substances of concern and
indicated that nickel may be subject to emission control
measures that are more stringent than those currently in effect.
It is not yet known what the EU nickel water quality standards
will be or what will be the consequences to industries producing
or using nickel in the EU.

Several directives related to the end of life of
nickel products are still being finalized and/or implemented in
the EU. These include a directive on integrated product policy,
end of life for vehicles, waste electrical and electronic
equipment, restrictions on the use of hazardous substances in
electrical and electronic equipment, and the revised batteries
directive. The revised batteries directive has been debated at
the European Commission, which decided against a ban on
nickel-cadmium batteries in favour of putting in place more
stringent recycling targets. This new version of the battery
directive is likely to be debated at the European Parliament
early in 2004 and, if sanctioned by the Parliament, would come
into force over the next few years in all EU member states.

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The Seveso 2 Directive recently reissued by the
European Commission is concerned with preventing major accidents
and releases of hazardous materials at industrial installations.
Industrial installations that store or produce certain tonnages
of hazardous substances listed in the Seveso Directive must make
a safety report to their local authorities and obtain a permit
for operation. Nickel oxide (granular form) remains listed in
the Directive.

Consideration is being given to revising the
European Commissions Marketing Restrictions and Use
Directive, which regulates the use of nickel in articles in
direct and prolonged contact with skin, such as jewelry. An
association of nickel producers of which the Company is a member
is closely following this initiative as part of its product
stewardship activities.

To comply with pollution control regulations in
the U.K., the Companys refineries at Clydach, Wales and
Acton, England have obtained the necessary authorizations to
continue to operate. These authorizations include prescribed
emission release limits and are conditional upon the Company
carrying out certain environmental improvements. In order to
achieve continuous improvement, the government reviews these
authorizations at least every four years, at which time new
environmental improvement conditions may be established. In late
2001 and early 2002, these authorizations were resubmitted to
the relevant governmental authorities as required under new
legislation arising from the EU Integrated Pollution Prevention
and Control directive. The authorization for the Acton refinery
has been received and there are no environmental improvement
conditions attached to it that are expected to have an adverse
effect on operations. The authorization for the Clydach refinery
was received containing several environmental improvement
conditions relating to reduced water and air emissions. A phased
program is in place to ensure this operation fulfils these
requirements within the agreed timeframes. Given that both the
Acton and Clydach refineries have received ISO 14001
certification, it is not expected that any of these conditions
will have an adverse effect on operations at the Clydach
refinery.






| |                              
| | -----------------------------
| | WHO Drinking Water Guidelines

The World Health Organization (the
WHO) periodically reviews its guideline values for
contaminants in drinking water. Its most recent review of nickel
in drinking water began in 1995. Over the past several years
nickel producers organizations, including NiPERA, have
made submissions to the WHO concerning the most appropriate
method for extrapolating animal test data to humans. The WHO
recommended an extraordinarily stringent guideline value of 20
micrograms of nickel per litre of drinking water. This value was
disputed by the nickel industry and, in a final action in 1997,
the WHO accepted the value as provisional. In 2000,
a new regulatory research study on the reproductive effects of
ingested nickel in animals was completed. This study, which was
funded by the nickel industry, provides an improved scientific
basis for setting a nickel guideline level for drinking water
and has been submitted to the WHO for its consideration. While
WHO is not a regulatory body itself, the WHO guideline values
influence governmental regulatory agencies around the world in
adopting standards. It is impossible to predict what the final
guideline level for nickel in drinking water will be, what
effect it will have in specific jurisdictions, including Canada,
or what impact it will have on the Companys results of
operations or financial condition.






| |                                            
| | -------------------------------------------
| | Other Environmental Control
    Regulations

The Company and other mining companies in Canada
are aware of and concerned about the increasing desire on the
part of many regulatory authorities throughout the world to
limit the mining, refining and use of metals in the future. This
desire is based on the belief of governments in the changing
expectations of society towards various approaches to the
concept of sustainable development, a concept that
has been defined by regulatory and other bodies differently but,
at a minimum, appears to focus on meeting the needs of the
present without compromising the ability of future generations
to meet their own needs. In response to this view, the Company
believes that there is a tendency for some governments to use
inadequate or incorrect information, to rely on inappropriate
methodologies, and to apply the so-called precautionary
principle in an unwarranted manner in making regulatory
decisions regarding metals. An example of this approach is the
predisposition by some regulators to identify metals, including
nickel, as persistent, bioaccumulative, toxic (PBT)
chemicals that should be targeted for use reduction or waste
minimization.

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In 1998, the EPA published a draft list of 53
chemicals or groups of chemicals described as PBT substances
that were to be the focus of a voluntary waste minimization
initiative. Eleven of the 53 chemicals on the list were metals,
including nickel. The inclusion of nickel on this list, if
finalized, could have led to increased regulation of nickel,
placing additional burdens on customers and users of nickel and
possibly resulting in the substitution of other products for
nickel. In submissions made to the EPA, the Company pointed out
that the scoring and ranking scheme used to develop this list
does not, on a scientific and technical basis, properly apply to
metals, so that nickel should be removed from the list.
Similarly, at an expert workshop conducted under the joint
sponsorship of EPA and other organizations in January 2000, the
prevailing view was that PBT criteria, which were developed to
evaluate potential environmental hazards of organic chemicals,
could not appropriately be applied to metals and inorganic metal
compounds. These views apparently had some effect. In the summer
of 2002, EPA released the final version of what is now referred
to as the Waste Minimization Priority Chemicals
List. Only three metals, cadmium, lead and mercury, are
included on the list, and they were selected for reasons that do
not involve a PBT determination.

For the last two years, EPA has been engaged in
developing a comprehensive cross-agency metals assessment
framework that will establish guidance for EPA programs to use
in assessing the hazards and risks of metals and metal
compounds. Completion of the framework is expected in the second
half of 2004 or the first half of 2005. In the fall of 2003, a
series of white papers addressing various issues
relating to the hazard assessment of metals was submitted to the
EPA. These white papers, prepared by independent experts under
contract to the EPA, emphasized the complexity of evaluating the
hazard potential of metals and questioned the scientific basis
for applying to metals the same PBT criteria that the EPA uses
to evaluate the hazards of organic compounds. In light of this,
it seems likely that the metals assessment framework as
ultimately adopted by the EPA will take a different
approach  one that is more suitable for evaluating
the hazards of metals and inorganic metal compounds.

In the future, as in the past, various
supranational, national, provincial, state and local governments
and authorities under which the Company operates may impose
regulations covering the emission of air pollutants, the
discharge of process wastewater and the generation, storage,
treatment and disposal of liquid and solid wastes that could
apply to various of the Companys operations and that could
impose additional compliance costs on the affected Inco
operating entities or on nickel-using industries. No proposed
regulation of which the Company is aware would currently impose
costs that would materially affect the Companys financial
position or operations. Reference is made to the discussion of
future removal and site restoration costs and related plans
under Future Removal and Site Restoration; Closure and
Post-Closure Plans above.






| |                                          
| | -----------------------------------------
| | Environment, Health and Safety
    Audits

The Company has, over the past number of years,
conducted environment, health and safety (EH&S)
audits at its wholly-owned operating facilities as well as at
operations in which it has at least a 50 per cent
equity interest and certain affiliates in which it has less than
a 50 per cent equity interest. The EH&S audit
program is reviewed annually by an external consultant in order
to provide the Company with an independent review of the
program, evaluate the extent to which the program is meeting
Incos goals and objectives, and determine whether the
program is in accordance with standard industry audit practices.
The Company has broadened the focus of its EH&S audits from
compliance audits, aimed at identifying specific problems, to
management system audits that seek not only to identify problems
but also to examine the root cause of these problems and correct
deficiencies in the system. The program comprises 17 key areas
(six environmental, two health, eight safety and one
administrative). Audit results are reported to the facility
management, which develops an action plan to correct any
deficiencies. The Environment, Health and Safety Committee of
Incos Board of Directors oversees the program, reviewing
audit findings and action plans. EH&S audits were conducted
at 9 facilities worldwide in 2003.






| |                                                
| | -----------------------------------------------
| | Environmental and Health Management
    Systems

In 2001, the Companys Canadian operations
began to develop and implement formal environmental management
systems conforming to the Mining Association of Canadas
Environmental Management Framework (the EMF). The
EMF also conforms to the ISO 14001 Environmental Management
System Standard.

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The Companys operations in the United
Kingdom, ITL, Jinco and Taiwan Nickel have been certified to the
ISO 14001 Environmental Management System Standard.


In order to conform to the ISO 14001
Standard, in 2001, the Company broadened its environmental,
health and safety policy to include policies related to social
responsibility and sustainable development and to include
pollution prevention as key elements of its policy. Work also
began on the identification and ranking of environmental aspects
and effects relating to the Companys operations and the
development of action plans to deal with any significant
environmental effects. This work continued in 2003.

In 2001, the Company established an internal
working group to undertake an analysis of current health
practices and activities in the Companys operations in
Canada and the United Kingdom with a view to creating a single
overarching health management system (HMS). The HMS
would provide a mechanism for workplace health management to
assist in meeting applicable legal and other health
requirements. In mid-2002, the Company elected to develop an
integrated Health, Safety and Environmental Management System
consistent with the Occupational Health and Safety Management
System (OHSMS) 18001 in the U.K., the ISO 9001 quality
standard, the environmental management system standard
ISO 14001, and the Mining Association of Canadas EMF.






| |          
| | ---------
| | Employees

At year-end 2003, the Company had 10,478
employees, compared with 10,534 employees at year-end 2002 and
10,258 employees at year-end 2001. At year-end 2003, 6,589 of
the Companys employees were located in Canada, 167 in the
United States, 392 in the United Kingdom, 2,977 in Indonesia and
353 in other countries. Most full-time employees participate in
the Companys performance through profit-sharing or other
bonus arrangements.

In late August 2003, the Company and its
unionized hourly production and maintenance workers at its
Ontario operations reached agreement on a new collective
agreement. This agreement followed a three-month strike that
began on June 1, 2003. The new agreement, which remains in
effect until May 31, 2006, included increases in wages and
pensions, an agreement with the union to reduce the cost of
delivering health care benefits while preserving benefit levels,
and certain efficiency improvements and cost savings on health
care benefits. The Companys three-year collective
agreement with its unionized office, clerical and technical
employees at its Ontario operations remains in effect until
March 31, 2004. At this time, the Company cannot predict
whether a new agreement with the employees can be reached by
March 31, 2004. The Company does not currently expect that,
if these employees were to go on strike, there would be any
significant disruption to production at the Ontario operations
or any other adverse effect on this units results of
operations. At the Manitoba operations, the Companys
three-year collective agreement with its unionized production
and maintenance workers remains in effect until September 2005.
In Indonesia, PT Inco entered into a new two-year contract
with its unionized employees in January 2003 which expires in
December 2004. In New Caledonia, the Company has two unions
representing some of its employees. Through an employers
association of which VBNC is the controlling member, the Company
negotiated a collective agreement in September 2002 covering the
construction of the initial phase of the Voiseys Bay
project.




Miscellaneous Investments

In connection with the disposition of the battery
and related products businesses conducted by Inco ElectroEnergy
Corporation (IEEC), which was completed in 1983, the
Company assumed responsibilities for certain expenditures and
other costs associated with certain proceedings or
administrative actions initiated by or involving the EPA or
state environmental agencies concerning certain facilities
operated by these businesses. It also assumed responsibility for
compliance by these facilities with applicable local
environmental regulations covering the treatment or discharge of
certain wastewaters, compounds or effluents into publicly-owned
treatment works, sewage systems, groundwater resources and
watercourses and the related cleanup of deposits of certain
minerals and compounds from such watercourses. The
Companys total accounting reserve relating to these
remaining responsibilities, which reflects their estimated cost,
increased to $30 million at year-end 2003 due primarily to
the cost estimates developed during 2003 associated with
remediation plans for two former industrial

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sites in the United States where the Company had
moved forward with the review by applicable state regulatory
agencies of these remediation plans it had developed for these
sites, compared with $7 million at year-end 2002 and
$8 million at year-end 2001.





Other Information

In addition to properties discussed under
Description of Business above, certain of
Incos sales offices are leased and the Company also leases
office space in Toronto, Ontario; London, England; Saddle Brook,
New Jersey; and in certain other locations around the world.

Operations in certain foreign countries involve
certain risks, including risks of monetary instability, changes
in exchange rates, inconvertibility of currencies and
expropriation and nationalization. For example, Indonesia
experienced a significant devaluation of its currency and other
economic issues in recent years and the uncertain political
situation in Indonesia, primarily the result of the economic,
social and political issues facing that country, could adversely
affect PT Incos ability to operate and, accordingly,
the Companys results of operations, financial condition
and prospects. For further information on the political
situation in Indonesia, see PT International Nickel
Indonesia Tbk  General above.

For financial information by geographic location,
see Note 19 to the financial statements under Item 8
of this Report.




Shareholder Rights Plan

The Companys current shareholder rights
plan is set out in a Rights Plan Agreement, as amended and
restated as noted below, entered into between the Company and
CIBC Mellon Trust Company, as Rights Agent, and is designed to
(i) encourage the fair and equal treatment of shareholders
in connection with any bid for control of the Company by
providing them with more time than the minimum statutory period
during which such bid must remain open in order to fully
consider their options, and (ii) provide the Companys
Board of Directors with additional time, if appropriate, to
pursue other alternatives to maximize shareholder value.

The plan was initially approved by the
Companys Board of Directors in September 1998 and became
effective in October 1998. It was amended in certain respects by
the Companys Board of Directors in February 1999 to ensure
that it was consistent with rights plans which had been recently
adopted by other Canadian companies. The amended plan was
approved by the shareholders at the Companys 1999 Annual
and Special Meeting of Shareholders in April 1999. In February
2002, Incos Board of Directors approved certain minor
amendments to the plan to ensure that its terms remained
consistent with other rights plans in Canada and unanimously
recommended that the plan, as proposed to be amended, be
reconfirmed, as amended and restated, by the shareholders. Such
reconfirmation by the shareholders was obtained at the
Companys Annual and Special Meeting of Shareholders in
April 2002. The plan remains in effect until October 2008
subject to reconfirmation by holders of the Companys
voting securities at the Companys annual meeting in 2005.

The rights issued under the plan are attached to
and trade with the Companys Common Shares and no separate
certificates will be issued unless an event triggering these
rights occurs. Certificates evidencing Common Shares will be
legended to reflect that they evidence the rights until the
Separation Time (as defined below). Holders of the
Companys LYON Notes and the certificates of entitlement
attached thereto (which entitle their holders to receive rights
in the event that the related security is converted into Common
Shares) will generally be entitled to receive, upon conversion
of the relevant security and presentment of the certificate of
entitlement, respectively, rights in an amount equal to the
number of Common Shares issued upon conversion of such
securities.

The rights will separate from the Common Shares
and be transferable, trade separately from the Common Shares and
become exercisable at the time (the Separation Time)
when a person acquires, or announces its intention to acquire,
beneficial ownership of 20 per cent or more of
(i) the Companys then outstanding Voting Securities
(defined at this time to be the Companys Common Shares) or
(ii) its then outstanding Common Shares alone, in either
case without complying with the permitted bid
provisions of the plan (as summarized below), or without the
approval of the Companys Board of Directors. Should such
an acquisition occur, each right would

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entitle its holders, other than the acquiring
person or persons related to or acting jointly or in concert
with such person, to purchase additional Common Shares of the
Company at a 50 per cent discount to the then current
market price. The acquisition by any person (an Acquiring
Person) of 20 per cent or more of the
Companys Common Shares or Voting Securities, other than by
way of a permitted bid, is referred to as a
Flip-in-Event. Any rights held by an Acquiring
Person will become void upon the occurrence of a Flip-in-Event.


A permitted bid is a bid made to all
holders of the Companys outstanding Voting Securities that
is open for at least 60 days. If, at the end of such 60-day
period, more than 50 per cent of the Companys
then outstanding Common Shares, other than those securities
owned by the party making the bid and certain related persons,
have been tendered, such party may take up and pay for the
Common Shares but must extend the bid for a further 10 business
days to allow other shareholders to tender, thus providing
shareholders who had not tendered to the bid with enough time to
tender to the bid once it is clear that a majority of Common
Shares have been tendered.

Under the plan, the Company can (i) waive
its application to enable a particular takeover bid to proceed,
in which case the plan will be deemed to have been waived with
respect to any other takeover bid made prior to the expiry of
any bid subject to such waiver or (ii) with the prior
approval of the holders of Voting Securities or rights, redeem
the rights for nominal consideration at any time prior to a
Flip-in-Event.

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Item 3.Legal
Proceedings

There are no material pending legal proceedings
to which the Company or any of its subsidiaries is a party or of
which their property is the subject. The Company and its
subsidiaries are subject to routine litigation incidental to the
business conducted by them, to various environmental
proceedings, and to other litigation related to such business
that the Company does not believe to be material. Among the
environmental proceedings are claims for personal injury,
enforcement actions and certain claims dating back a number of
years in which one of the Companys subsidiaries was
designated, under the United States federal environmental law
known as Superfund, or CERCLA, as a
potentially responsible party. The Superfund claims assert that,
as a potentially responsible party, the Companys
subsidiary sent waste to a contaminated landfill or similar site
and is jointly and severally liable for the cost of remediating
such site. These claims have not proceeded to a point where a
reliable assessment can be made of the costs to the Company,
assuming responsibility is found to exist or liability is
determined, but the Company believes, based upon its present
information concerning these matters and its past experience,
that its potential liability, if found to exist, would not be
significant.

The Company has from time to time been named as a
party or charged in connection with the alleged violation of,
including exceeding regulatory limits relating to discharges
under, certain environmental or similar laws and regulations
applicable to its operations in Canada and elsewhere. Such
proceedings have involved, and with respect to currently pending
charges may ultimately involve, fines or similar sanctions in
excess of $100,000. However, none of these currently pending or
threatened proceedings are material, either singly or in the
aggregate, to the Companys results of operations,
financial condition or liquidity.




Item 4.Submission
of Matters to a Vote of Security Holders

None.

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Executive Officers of Inco Limited

The names, offices held and ages as of
February 20, 2004 of the executive officers of Inco Limited
are shown below.

|                     |  |                                                                          |  |     |    |         |  |  |      | 
|-------------------- |  | ------------------------------------------------------------------------ |  | --- | -- | ------- |  |  | ---- | 
|                     |  |                                                                          |  |     |    | Officer
|Name                 |  | Office                                                                   |  | Age |    | Since  
|                     |  |                                                                          |  |     |    |        
|Scott M. Hand        |  | Chairman and Chief Executive Officer                                     |  |     | 61 |         |  |  | 1984 | 
|Peter C. Jones       |  | President and Chief Operating Officer                                    |  |     | 56 |         |  |  | 1997 | 
|Stuart F. Feiner     |  | Executive Vice-President, General Counsel and
    Secretary              |  |     | 55 |         |  |  | 1992 | 
|Peter J. Goudie      |  | Executive Vice-President, Marketing                                      |  |     | 55 |         |  |  | 1997 | 
|Farokh S. Hakimi     |  | Executive Vice-President and Chief Financial
    Officer                 |  |     | 55 |         |  |  | 2002 | 
|Logan W. Kruger      |  | Executive Vice-President, Technical Services                             |  |     | 53 |         |  |  | 2003 | 
|Ronald C. Aelick     |  | Executive Vice-President and President, Canadian
    and U.K. Operations |  |     | 55 |         |  |  | 1995 | 
|Wm. Gordon Bacon     |  | Vice-President, Technology and Engineering                               |  |     | 59 |         |  |  | 1997 | 
|Subhash Bhandari     |  | Vice President and Chief Information Officer                             |  |     | 59 |         |  |  | 2001 | 
|Bruce R. Conard      |  | Vice-President, Environmental and Health Sciences                        |  |     | 61 |         |  |  | 1995 | 
|Mark J. Daniel       |  | Vice-President, Human Resources                                          |  |     | 57 |         |  |  | 2000 | 
|Philippus F. du Toit |  | Managing Director, Voiseys Bay Nickel
    Company Limited               |  |     | 51 |         |  |  | 2003 | 
|Donald T. Hurley     |  | Vice-President and Treasurer                                             |  |     | 56 |         |  |  | 1998 | 
|John B. Jones        |  | Vice-President, Business Development 
    Asia                          |  |     | 61 |         |  |  | 1999 | 
|Gary G. Kaiway       |  | Vice President, Taxation                                                 |  |     | 55 |         |  |  | 2001 | 
|William B. Kipkie    |  | Vice-President, Inco Special Products                                    |  |     | 58 |         |  |  | 2003 | 
|Ronald A. Lehtovaara |  | Vice-President and Comptroller                                           |  |     | 53 |         |  |  | 1996 | 
|William A. Napier    |  | Vice-President, Environment and Health                                   |  |     | 49 |         |  |  | 2000 | 
|S. Nicholas Sheard   |  | Vice-President, Exploration                                              |  |     | 54 |         |  |  | 2003 | 
|Alan C. Stubbs       |  | Vice-President, Public and Government Affairs                            |  |     | 59 |         |  |  | 1999 | 

Each executive officer is elected by the Board of
Directors of Inco Limited annually, at the first meeting of such
Board (Annual Board Meeting) after the annual
meeting of shareholders, for a term of one year or until a
successor shall have been duly chosen and qualified, except in
those cases where an executive officer is elected at other than
the Annual Board Meeting, in which event such executive
officers tenure will expire at the next Annual Board
Meeting unless re-elected. Such tenure is subject to an
officers resignation or removal as provided in the
Companys By-law No. 1, its sole by-law, and the
Companys standing resolution adopted pursuant thereto.

Except for the officers mentioned below, each
executive officer named above has been an officer or executive
or key managerial employee of Inco Limited or one of its
subsidiaries during the past five years. From October 1997 until
November 1999, Mr. Hakimi was Vice-President and Treasurer
of Cyprus Amax Mineral Company, a leading producer of copper and
the worlds largest producer of molybdenum, based in
Englewood, Colorado, and from January 2000 until July 2001 he
was Vice-President and Chief Financial Officer of Rio Algom
Limited, a global mining and metals company based in Toronto,
Ontario. From September 1998 until June 2002, Mr. Kruger
was President and Chief Executive Officer, Hudson Bay Mining and
Smelting Co. Limited, a mining company based in Winnipeg,
Manitoba, and from June 2002 until September 2003, he was
Executive Vice President and Head of Copper, Anglo American plc,
a global mining and metals company based in London, England.
From May 1997 until January 2000, Mr. du Toit was
Operations Director, Voest Alpine Industries Inc., an
engineering company based in Poole, England, and from February
2000 until April 2003 he held senior management positions, most
recently President, with Diavik Diamond Mines Inc., a diamond
mining company based in Yellowknife, Northwest Territories.
During the five-year period prior to joining the Company,
Mr. Bhandari held senior management positions, most
recently General Manager, Purchasing and Information Systems,
with Toyota Motor Manufacturing Canada Ltd., an automobile
manufacturing company based in Cambridge, Ontario;
Mr. Kaiway held senior management positions, most recently
Vice-President, Taxation, with Placer Dome Inc., a

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gold mining company based in Vancouver, British
Columbia; Mr. Sheard held senior management positions, most
recently Global Exploration Manager, with MIM Holdings Pty Ltd.,
a base metals, gold and coal mining company based in Brisbane,
Australia; and Mr. Stubbs was Vice-President, Public
Affairs, MacMillan Bloedel Limited, a forest products company
based in Vancouver, British Columbia. None of these companies is
affiliated with Inco Limited.


The dates shown in the table extend from the
first date of election as an executive officer of the Company.
There are no family relationships among the directors and
executive officers of Inco, and no arrangements or
understandings between any executive officer and any other
person pursuant to which he was elected as an executive officer.

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PART II





|        |                                                                                                                                             
|------- | --------------------------------------------------------------------------------------------------------------------------------------------
|Item 5. | Markets for Inco Limiteds Common
    Shares, Related Shareholder Matters and Inco Limiteds
    Issuances or Purchases of Equity Securities



Common Shares



Market
Information

There are two principal markets on which the
Companys Common Shares are traded, the New York Stock
Exchange (the NYSE) and the Toronto Stock Exchange
(the TSX).

The high and low closing sale prices for the
Companys Common Shares as reported on the NYSE and the TSX
for each quarter during the past two years are as follows:

|     |  |                                  |       |       |  |       |       |       |  |       |       |       |  |       |       |       |  |  |       |  |  |  |       |  |  |  |       |  |  |  |       | 
|---- |  | -------------------------------- | ----- | ----- |  | ----- | ----- | ----- |  | ----- | ----- | ----- |  | ----- | ----- | ----- |  |  | ----- |  |  |  | ----- |  |  |  | ----- |  |  |  | ----- | 
|     |  |                                 
|     |  | New York Stock Exchange (U.S. $)
|     |  |                                 
|     |  |                                  |       |      
|     |  | 2003                             |       | 2002 
|     |  |                                  |       |      
|     |  | 1st Q                            |       | 2nd Q |  | 3rd Q |       | 4th Q |  | 1st Q |       | 2nd Q |  | 3rd Q |       | 4th Q
|     |  |                                  |       |       |  |       |       |       |  |       |       |       |  |       |       |      
|High |  |                                  | 23.12 |       |  |       | 21.17 |       |  |       | 28.51 |       |  |       | 40.90 |       |  |  | 19.82 |  |  |  | 23.66 |  |  |  | 22.45 |  |  |  | 21.99 | 
|Low  |  |                                  | 18.00 |       |  |       | 18.30 |       |  |       | 20.98 |       |  |       | 28.30 |       |  |  | 16.52 |  |  |  | 18.98 |  |  |  | 15.30 |  |  |  | 15.51 | 

|     |  |                                     |       |       |  |       |       |       |  |       |       |       |  |       |       |       |  |  |       |  |  |  |       |  |  |  |       |  |  |  |       | 
|---- |  | ----------------------------------- | ----- | ----- |  | ----- | ----- | ----- |  | ----- | ----- | ----- |  | ----- | ----- | ----- |  |  | ----- |  |  |  | ----- |  |  |  | ----- |  |  |  | ----- | 
|     |  |                                    
|     |  | The Toronto Stock Exchange (Cdn. $)
|     |  |                                    
|     |  |                                     |       |      
|     |  | 2003                                |       | 2002 
|     |  |                                     |       |      
|     |  | 1st Q                               |       | 2nd Q |  | 3rd Q |       | 4th Q |  | 1st Q |       | 2nd Q |  | 3rd Q |       | 4th Q
|     |  |                                     |       |       |  |       |       |       |  |       |       |       |  |       |       |      
|High |  |                                     | 35.40 |       |  |       | 28.67 |       |  |       | 38.46 |       |  |       | 53.63 |       |  |  | 31.40 |  |  |  | 36.25 |  |  |  | 33.91 |  |  |  | 34.25 | 
|Low  |  |                                     | 26.35 |       |  |       | 25.15 |       |  |       | 27.99 |       |  |       | 37.98 |       |  |  | 26.35 |  |  |  | 30.16 |  |  |  | 24.30 |  |  |  | 24.80 | 

On March 12, 2004, the closing sale prices for
the Companys Common Shares were $34.90 on the NYSE and
Cdn.$46.68 on the TSX.

During the fourth quarter of 2003, no equity
securities of the Company were sold by the Company which were
not registered under the Securities Act of 1933, as amended.




Holders of
Common Shares

The total number of holders of record of the
Companys Common Shares as of February 20, 2004 was
18,009.




Dividends

Subject to the preferential rights of any prior
ranking shares (of which none were issued and outstanding as of
the date of this report), the holders of Common Shares are
entitled to such dividends as may be declared by the Board of
Directors out of funds legally available therefor. No dividend
or other distribution on the Common Shares shall be paid, and no
Common Share shall be acquired for value, unless dividends on
all outstanding Preferred Shares have been paid for all past
quarterly periods.

At its meeting in February 1999, the Board of
Directors eliminated the payment of quarterly dividends in
respect of the Common Shares. The Board continues to review on a
periodic basis the declaration and payment of dividends on the
Common Shares in the future. The Companys dividend policy,
under normal circumstances and after taking into account the
Companys short-term and long-term needs and objectives, is
to declare and pay dividends on the Common Shares averaging
approximately one-third of reported net earnings over a period
of years. A sustainable level of regular quarterly dividends
would be paid, adjusted, when appropriate, by extra dividends.
The quarter-to-quarter decision as to the restoration and amount
of any quarterly dividend per Common Share is reviewed by the
Board of Directors and determined with reference to a number of
factors, including current business results and cash needs.

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Common Share
Purchase Warrants

As part of the redemption price the Company paid
in connection with the redemption of the Companys
Class VBN Shares discussed under Class VBN
Shares below, the Company issued approximately
11 million Common Share Purchase Warrants (the
Warrants). The Warrants were issued under, and are
governed by, a Warrant Agreement dated as of December 1,
2000 by and among the Company, CIBC Mellon Trust Company, as the
Canadian Warrant Agent, and ChaseMellon Shareholder
Services, L.L.C., as the U.S. Warrant Agent (the
Warrant Agreement).

Each whole Warrant entitles the holder to
purchase one Common Share at an exercise price of Cdn.$30.00 (or
the equivalent in U.S. dollars based upon then prevailing
exchange rates at the time of exercise), subject to certain
adjustments (the Exercise Price), until 5:00 pm
(Toronto time) on August 21, 2006. Any Warrants not
exercised prior to such date will expire. A Warrantholder does
not have any voting or pre-emptive rights or any other rights as
a shareholder of the Company until the Warrants held by such
holder have been duly exercised and Common Shares of the Company
have been issued to the holder pursuant thereto.

The Warrant Agreement provides that the Exercise
Price and/or the number and kind of securities or property
issuable on the exercise of the Warrants are subject to
adjustment in certain events, including (1) the subdivision
or consolidation of the Common Shares, (2) the issuance to
all or substantially all the holders of Common Shares of a stock
dividend or other distributions excluding any issuance of
securities to holders of outstanding Common Shares which
constitutes a Dividend Paid in the Ordinary Course
(defined generally in the Warrant Agreement to include dividends
or other distributions exceeding certain threshold aggregate or
annual amounts based upon the value of the dividends or other
distributions paid or consolidated net earnings for specified
periods), and (3) the distribution to all or substantially
all the holders of Common Shares of (i) shares of any other
class, (ii) rights, options or warrants to acquire Common
Shares, or (iii) cash, property or other assets of the
Company (excluding, in each case, Dividends Paid in the
Ordinary Course).

The Exercise Price and/or the number and kind of
securities or property issuable on exercise will also be subject
to certain adjustments in connection with certain other events,
including any change, reclassification or alteration of the
Common Shares, the consolidation, amalgamation, merger or other
similar arrangement of the Company with another Company, or the
transfer of all or substantially all of the Companys
assets.

No adjustment in the Exercise Price or the number
or kind of securities or property issuable upon exercise will be
required to be made (1) unless the cumulative effect of
such adjustment or adjustments would change the Exercise Price
by at least one per cent or, in the event of a change in the
number of Common Shares purchasable upon exercise, the number of
Common Shares issuable would change by at least one
one-hundredth of a Common Share or (2) in respect of the
issue of Common Shares pursuant to (i) the exercise of the
Warrants or (ii) the Companys Optional Stock Dividend
Program and Share Purchase Plan and options granted current or
former employees of the Company or any other option or share
purchase plan.

The Warrant Agreement provides that modifications
and alterations to it and to the Warrants may be made if
authorized by extraordinary resolution and if all other
necessary approvals are received. The term extraordinary
resolution is defined in the Warrant Agreement to mean, in
effect, a resolution passed by the affirmative votes of the
holders of not less than 66 2/3 per cent of the Warrants
represented and voting at a meeting of Warrantholders or an
instrument or instruments in writing signed by the holders of
not less than 66 2/3 per cent of the outstanding
Warrants. The Warrant Agreement and the Warrants may be modified
and altered without authorization by extraordinary resolution
and if all necessary approvals are received in order to cure
defects or ambiguities, to make ministerial amendments otherwise
provided that the rights of Warrantholders are not materially
adversely affected thereby.

The Warrants are listed on the TSX and on the
NYSE. Subject to applicable law, Inco may purchase Warrants
in the market or by tender or private contract, and any Warrants
so purchased will be cancelled.




Other
Information

Under its articles of continuance, the Company is
authorized to issue an unlimited number of Common Shares.

82



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For a description of the Companys
outstanding debentures and notes which are convertible into
Common Shares, see Notes 11 and 14 to the financial
statements under Item 8 of this Report.

The Common Shares have general voting rights. At
shareholders meetings, each holder of these securities is
entitled to one vote for each share held and there are no
cumulative voting provisions. See Note 17 to the financial
statements under Item 8 this Report.




Class VBN Shares

At a special meeting of shareholders held on
November 28, 2000, the Company received the requisite
shareholder approval to amend the terms of the Class VBN
Shares that had been created in August 1996 in connection with
the Companys acquisition of Diamond Fields to provide for
their redemption. The amendments allowed the Company to redeem
each of its Class VBN Shares for Cdn.$7.50 (or the
equivalent in U.S. dollars) in cash and a fraction, 0.45,
of a Warrant. For a description of the Warrants, see
Common Share Purchase Warrants above. All of the
Class VBN Shares were redeemed by the Company, effective
December 14, 2000, for a total redemption price of
$133 million plus approximately 11.6 million Warrants
which were reserved for issuance. As of December 31, 2003,
2002 and 2001, approximately 11 million Warrants had been
issued in connection with this redemption. Approximately 550,000
Warrants still have not been issued given the limited number of
holders of Class VBN Shares who did not accept the
redemption consideration and elected under applicable
legislation prior to the effective date of the redemption to
have a court in the Province of Ontario determine the fair value
of their Class VBN Shares. Through March 12, 2004,
this court proceeding was still in discovery and related
preliminary stages.




Preferred Shares





| |                                                          
| | ---------------------------------------------------------
| | Certain Provisions of the Preferred Shares
    as a Class






| |                   
| | ------------------
| | Issuable in Series

The Companys authorized share capital
includes 45 million Preferred Shares issuable in series,
each series consisting of such number of shares and having such
provisions attached thereto as may be determined by the Board of
Directors of the Company, subject to a maximum aggregate issue
price of Cdn.$1,500 million (or the equivalent in other
currencies). As of the date of this Report, no Preferred Shares
were issued or outstanding.




Priority

The Preferred Shares of each series rank on a
parity with the Preferred Shares of every other series, and
prior to the Common Shares with respect to the payment of
cumulative dividends and the distribution of assets on a
liquidation, dissolution or winding up of the Company or for the
purpose of winding up its affairs (liquidation).






| |                                                      
| | -----------------------------------------------------
| | Creation and Issue of Additional Preferred
    Shares

Subject to applicable law, the Company may,
without the consent of the holders of the Preferred Shares as a
class, (i) create additional Preferred Shares,
(ii) create preferred shares of another class or classes
ranking on a parity with the Preferred Shares with respect to
the payment of dividends and/or the distribution of assets on
liquidation and (iii) increase any maximum number of
authorized shares of any one or more of such other classes of
shares. If (but only so long as) any dividends are in arrears on
any outstanding series of the Preferred Shares, the Company may
not, without the consent, by a simple majority of the votes
cast, of the holders of the Preferred Shares as a class,
(i) issue any additional series of the Preferred Shares, or
(ii) issue preferred shares of another class ranking on a
parity with the Preferred Shares with respect to the payment of
dividends and/or the distribution of assets on liquidation.






| |                    
| | -------------------
| | Class Voting Rights

The holders of the Preferred Shares are not
entitled to any voting rights as a class except (i) as
provided above, (ii) as provided by law, or (iii) with
respect to the right to vote on certain matters as described
under

83



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Modification below. When the holders
of Preferred Shares vote as a class, or when two or more series
of Preferred Shares vote together at a joint meeting, each
holder has one one-hundredth of a vote in respect of each
Canadian dollar (or its equivalent in a foreign currency at the
date of issuance) of the issue price of the Preferred Shares he
or she holds.


The Board of Directors of the Company may, at the
time of creation of any series of Preferred Shares, confer
voting rights on such series in addition to the voting rights of
the holders of the Preferred Shares as a class. It is the Board
of Directors intention that, with respect to the creation
of any future series of Preferred Shares, to the extent that
such Preferred Shares would have general voting rights then such
shares would not have more than one vote in respect of each
Preferred Share. The voting rights attached to the Series E
Preferred Shares as a series are summarized below under
Certain Provisions of the Series E Preferred Shares
as a Series  Series Voting Rights.




Modification

The class provisions attaching to the Preferred
Shares may be amended at any time with such approval of the
holders of such shares as may then be required by law or by the
rules of any stock exchange on which the shares or any series of
Preferred Shares are then listed. Currently, this approval
requirement is by at least two-thirds of the votes cast at a
meeting of such holders duly called for the purpose and at which
a quorum is present, or as are required by the rules of any
stock exchange upon which the shares of any series of Preferred
Shares are then listed. In addition, the approval by at least
two-thirds of the votes cast at a meeting of the holders of all
shares of the Company carrying general voting rights is
currently required by law for the amendment of such class
provisions.






| |                              
| | -----------------------------
| | Series E Preferred
    Shares

The Series E Preferred Shares issued in
August 1996 in connection with the acquisition of Diamond Fields
were redeemed by the Company on May 1, 2003.

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Securities Authorized for Issuance Under
Equity Compensation Plans

The number of shares of the Company that may be
issued upon the exercise of outstanding options, warrants and
rights under the Companys equity compensation plans at
December 31, 2003, the weighted average exercise price of
such options, warrants and rights, and the number of shares
remaining available for future issuance under such plans are
shown in the following table:

|                                                               |  |                   |           |                |  |                      |       |  |  |  |           |    
|-------------------------------------------------------------- |  | ----------------- | --------- | -------------- |  | -------------------- | ----- |  |  |  | --------- | ---
|                                                               |  |                   |           |                |  | (C)                 
|                                                               |  | (A)               |           | (B)            |  | Number of           
|                                                               |  | Number of         |           | Weighted       |  | remaining securities
|                                                               |  | securities to be  |           | average        |  | available for future
|                                                               |  | issued upon       |           | exercise price |  | issuance under      
|                                                               |  | exercise of       |           | of outstanding |  | equity compensation 
|                                                               |  | outstanding       |           | options,       |  | plans (excluding    
|                                                               |  | options, warrants |           | warrants and   |  | securities reflected
|Plan category                                                  |  | and rights(1)     |           | rights         |  | in column (A))(2)   
|                                                               |  |                   |           |                |  |                     
|Equity compensation plans approved by security
    holders     |  |                   | 4,572,605 |                |  | $                    | 23.43 |  |  |  | 3,785,000 | (3)
|Equity compensation plans not approved by
    security holders |  |                   |          |                |  |                      |      |  |  |  |          |    
|                                                               |  |                   |           |                |  |                      |       |  |  |  |           |    
|Total                                                          |  |                   | 4,572,605 |                |  | $                    | 23.43 |  |  |  | 3,785,000 | (3)
|                                                               |  |                   |           |                |  |                      |       |  |  |  |           |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes shares authorized for issuance upon the
    exercise of options outstanding as of December 31, 2003
    under (i) the Companys 1993 Key Employee Incentive
    Plan and 1997 Key Employees Incentive Plan, each of which has
    been superseded and under which no further options may be
    granted; (ii) the Companys 2001 Key Employees
    Incentive Plan; and (iii) the Companys 2002
    Non-Employee Director Share Option Plan which has been suspended
    by the Companys Board of Directors as of February 3,
    2004 (the 2002 NEDSOP).
|(2) | Includes shares authorized for issuance as of
    December 31, 2003 pursuant to the exercise of options which
    may be granted under the Companys 2001 Key Employees
    Incentive Plan and the 2002 NEDSOP.                                                                                                                                                                                                                                                                                                                                                      
|(3) | Includes 200,000 Common Shares available for
    future issuance under the 2002 NEDSOP. See Note 1 above.                                                                                                                                                                                                                                                                                                                                                                                                                                                            




Other Information

There are no charter or contractual provisions
expressly limiting either the amount of cash dividends which the
Company may declare and pay on its Common Shares or the right of
non-residents of Canada, as such, to hold or vote any of the
Common Shares of the Company. There are, however, certain
requirements on the acquisition of control of Incos
securities by non-residents of Canada. The Investment Canada
Act(the Act) requires notification to and, in
certain cases, advance review and approval by, the Government of
Canada, of the acquisition by a non-Canadian of
control of a Canadian business, all as
defined in the Act. Generally speaking, in order for an
acquisition to be subject to advance review and approval, the
asset value of the Canadian business being acquired must meet or
exceed certain monetary thresholds. See also the discussion of
the Shareholder Rights Plan under Shareholder Rights
Plan above and in Note 17 to the financial statements
under Item 8 of this Report.

Canadian federal tax legislation, in conjunction
with applicable tax treaties, generally requires a 15 per
cent withholding from dividends paid to the Companys
shareholders resident in the United States, the United Kingdom
and most western European countries. Similarly, depending upon
applicable tax treaties, dividends paid to other non-residents
of Canada are subject to a withholding tax at a maximum rate of
25 per cent. Interest payable on the Companys debt
securities held by non-Canadian residents may also be subject to
Canadian withholding tax, depending upon the terms and
provisions of such securities and any applicable tax treaties.
United States backup withholding may apply to dividend and
certain other payments made to beneficial owners of the
Companys shares who are United States persons for United
States federal income tax purposes and who (i) fail to
provide an accurate taxpayer identification number or are
notified by the Internal Revenue Service that they have failed
to report all interest and dividends required to be shown on
their federal income tax returns or (ii) in certain
circumstances, fail to comply with applicable certification
requirements.

Canadian federal tax legislation, in conjunction
with applicable tax treaties, generally requires that we
withhold 15 per cent from dividends paid by the Company to
its shareholders resident in the United States, the United
Kingdom and most western European countries. Similarly,
depending upon applicable tax treaties,

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dividends paid to other non-residents of Canada
are subject to a withholding tax at a maximum rate of
25 per cent. The amount of a stock dividend (for tax
purposes) would generally be equal to the amount by which the
stated capital of the Company has increased by reason of the
payment of such dividend. Under regulations presently in effect
in the United States, the Company is generally subject to the
U.S. backup withholding rules which would require
withholding at a rate of 28 per cent on dividends and
interest paid to certain U.S. persons who have not provided
the Company with a taxpayer identification number. Recent
legislation enacted in the U.S. has reduced the tax rate to
15 per cent on dividends paid to U.S. individual
shareholders of non-U.S. corporations such as the Company
that meet certain requirements.


Through subsidiaries and affiliates, the
Companys operations are conducted in numerous countries
and some $2,600 million of the Companys consolidated
total assets are located outside Canada and the United States.
Accordingly, operations are subject to various governmental
policies or regulations and changes therein and the risks
associated with doing business in many overseas locations.

At year-end 2003, 62 per cent of the holders
of our common shares had addresses in Canada, 28 per cent
had addresses in the United States and 10 per cent
elsewhere. With respect to our Common Shares, as of year-end
2003 Canadian residents of record held 46 per cent of our
issued and outstanding Common Shares, United States residents of
record held 53 per cent and residents of record of other
countries held one per cent.

86



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following table provides selected financial
data as reported in the Companys Consolidated Financial
Statements on the basis of Canadian generally accepted
accounting principles (GAAP):

|                                                              |  |                                           |       |            |  |            |        |            |  |            |       |   |  |  |       |   |  |  |       |  
|------------------------------------------------------------- |  | ----------------------------------------- | ----- | ---------- |  | ---------- | ------ | ---------- |  | ---------- | ----- | - |  |  | ----- | - |  |  | ----- | -
|                                                              |  |                                          
|                                                              |  | Year Ended December 31,                  
|                                                              |  |                                          
|                                                              |  | 2003                                      |       | 2002(3)    |  | 2001(3)    |        | 2000(3)    |  | 1999(1)(3)
|                                                              |  |                                           |       |            |  |            |        |            |  |           
|                                                              |  |                                           |       | (Restated) |  | (Restated) |        | (Restated) |  | (Restated)
|                                                              |  |                                          
|                                                              |  | ($ in millions, except per share amounts)
|Net sales                                                     |  | $                                         | 2,474 |            |  |            | 2,161  |            |  |            | 2,066 |   |  |  | 2,917 |   |  |  | 2,113 |  
|Cost of sales and operating expenses                          |  | $                                         | 1,735 |            |  |            | 1,378  |            |  |            | 1,416 |   |  |  | 1,776 |   |  |  | 1,604 |  
|Depreciation and depletion                                    |  | $                                         | 265   |            |  |            | 255    |            |  |            | 263   |   |  |  | 265   |   |  |  | 248   |  
|Selling, general and administrative                           |  | $                                         | 169   |            |  |            | 136    |            |  |            | 111   |   |  |  | 105   |   |  |  | 99    |  
|Asset impairment charges                                      |  | $                                         |      |            |  |            | 2,415  |            |  |            |      |   |  |  |      |   |  |  |      |  
|Interest expense                                              |  | $                                         | 44    |            |  |            | 50     |            |  |            | 56    |   |  |  | 83    |   |  |  | 73    |  
|Income and mining taxes                                       |  | $                                         | (49   | )          |  |            | (639   | )          |  |            | (85   | ) |  |  | 225   |   |  |  | 25    |  
|Earnings (loss) from continuing operations                    |  | $                                         | 137   |            |  |            | (1,482 | )          |  |            | 304   |   |  |  | 399   |   |  |  | 16    |  
|Earnings (loss) from discontinued operations                  |  | $                                         |      |            |  |            |       |            |  |            |      |   |  |  |      |   |  |  | (5    | )
|Net earnings (loss)                                           |  | $                                         | 137   |            |  |            | (1,482 | )          |  |            | 304   |   |  |  | 399   |   |  |  | 11    |  
|Preferred dividends                                           |  | $                                         | (6    | )          |  |            | (26    | )          |  |            | (26   | ) |  |  | (26   | ) |  |  | (26   | )
|Accretion of convertible debt                                 |  | $                                         | (7    | )          |  |            | (4     | )          |  |            | (3    | ) |  |  |      |   |  |  |      |  
|Premium on redemption of Preferred Shares                     |  | $                                         | (15   | )          |  |            |       |            |  |            |      |   |  |  |      |   |  |  |      |  
|Net earnings (loss) applicable to common shares               |  | $                                         | 109   |            |  |            | (1,512 | )          |  |            | 275   |   |  |  | 373   |   |  |  | (15   | )
|Net earnings (loss) per common share 
    basic (2)          |  | $                                         | 0.59  |            |  |            | (8.27  | )          |  |            | 1.51  |   |  |  | 2.06  |   |  |  | (0.08 | )
|Common shares outstanding (weighted average, in
    millions) |  |                                           | 185   |            |  |            | 183    |            |  |            | 182   |   |  |  | 182   |   |  |  | 176   |  
|Total assets                                                  |  | $                                         | 9,006 |            |  |            | 8,577  |            |  |            | 9,630 |   |  |  | 9,726 |   |  |  | 9,618 |  
|Long-term debt                                                |  | $                                         | 1,409 |            |  |            | 1,546  |            |  |            | 759   |   |  |  | 952   |   |  |  | 1,154 |  
|Convertible debt                                              |  | $                                         | 606   |            |  |            | 238    |            |  |            | 231   |   |  |  |      |   |  |  |      |  
|Preferred shares                                              |  | $                                         |      |            |  |            | 472    |            |  |            | 472   |   |  |  | 472   |   |  |  | 471   |  
|Class VBN shares                                              |  | $                                         |      |            |  |            |       |            |  |            |      |   |  |  |      |   |  |  | 753   |  



---



|    |                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain information for the year 1999 has been
    restated to reflect the retroactive application of the asset and
    liability method to calculate deferred income and mining taxes
    (see Note 2 to the Companys 2001 financial
    statements).
|(2) | Net earnings (loss) per common share is
    calculated by dividing net earnings (loss) applicable to Common
    Shares by the weighted-average number of Common Shares issued
    and outstanding for the relevant period.                             
|(3) | Reference is made to Note 2(c) to the
    financial statements under Item 8 of this Report.                                                                                                                                                            

There are a number of differences between
Canadian and United States GAAP. The differences, insofar as
they affect the Companys Consolidated Financial
Statements, relate to accounting for post-retirement benefits,
depreciation and depletion, intangible assets, research and
development, exploration, asset impairment, our convertible
debt, derivative instruments, investments, income and mining
taxes and reporting of comprehensive income. A full discussion
of these differences is presented in the Notes to the financial
statements under Item 8 of this Report and, in particular,
Note 23 to such financial statements.

87



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The following table reconciles results as
reported under Canadian GAAP with those that would have been
reported under United States GAAP:

|                                                                                                          |                                                                                                |                                           |     |               |   |               |        |        |   |         |     |      |  |   |     |      |  |   |    |       |  
|--------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------------------- | --- | ------------- | - | ------------- | ------ | ------ | - | ------- | --- | ---- |  | - | --- | ---- |  | - | -- | ----- | -
|                                                                                                          |                                                                                                |                                          
|                                                                                                          |                                                                                                | Year Ended December 31,                  
|                                                                                                          |                                                                                                |                                          
|                                                                                                          |                                                                                                | 2003                                      |     | 2002          |   | 2001          |        | 2000   |   | 1999(1)
|                                                                                                          |                                                                                                |                                           |     |               |   |               |        |        |   |        
|                                                                                                          |                                                                                                |                                           |     | (Restated)(2) |   | (Restated)(2) |        |        |   |        
|                                                                                                          |                                                                                                |                                          
|                                                                                                          |                                                                                                | ($ in millions, except per share amounts)
|Earnings (loss) from continuing
    operations  Canadian GAAP                                            |                                                                                                | $                                         | 137 |               |   | $             | (1,482 | )      |   | $       | 304 |      |  | $ | 400 |      |  | $ | 17 |      
|Increased post-retirement benefits expense                                                                |                                                                                                |                                           | (37 | )             |   |               | (23    | )      |   |         | (22 | )    |  |   | (22 | )    |  |   |   |      
|Decreased depreciation and depletion expense                                                              |                                                                                                |                                           | 38  |               |   |               | 13     |        |   |         |    |      |  |   |    |      |  |   |   |      
|Increased intangible assets amortization expense                                                          |                                                                                                |                                           | (2  | )             |   |               | (2     | )      |   |         |    |      |  |   |    |      |  |   |   |      
|Increased research and development expense                                                                |                                                                                                |                                           | (5  | )             |   |               | (6     | )      |   |         | (8  | )    |  |   |    |      |  |   |   |      
|Increased exploration expense                                                                             |                                                                                                |                                           | (4  | )             |   |               | (3     | )      |   |         | (7  | )    |  |   |    |      |  |   |   |      
|Increased asset impairment charges                                                                        |                                                                                                |                                           |    |               |   |               | (708   | )      |   |         |    |      |  |   |    |      |  |   |   |      
|Increased interest expense                                                                                |                                                                                                |                                           | (25 | )             |   |               | (9     | )      |   |         | (11 | )    |  |   |    |      |  |   |   |      
|Unrealized net gain (loss) on derivative
    instruments                                                  |                                                                                                |                                           | (1  | )             |   |               | 5      |        |   |         | (4  | )    |  |   |    |      |  |   |   |      
|Increased income and mining tax expense                                                                   |                                                                                                |                                           | (15 | )             |   |               |       |        |   |         |    |      |  |   |    |      |  |   |   |      
|Decreased (increased) minority interest                                                                   |                                                                                                |                                           | (9  | )             |   |               | (3     | )      |   |         | 2   |      |  |   |    |      |  |   |   |      
|Change in accounting policy                                                                               |                                                                                                |                                           |    |               |   |               | 1      |        |   |         | 1   |      |  |   |    |      |  |   |   |      
|Taxes on United States GAAP differences                                                                   |                                                                                                |                                           | 18  |               |   |               | 141    |        |   |         | 17  |      |  |   | 9   |      |  |   |   |      
|                                                                                                          |                                                                                                |                                           |     |               |   |               |        |        |   |         |     |      |  |   |     |      |  |   |    |      
|Earnings (loss) from continuing
    operations  United States GAAP                                       |                                                                                                |                                           | 95  |               |   |               | (2,076 | )      |   |         | 272 |      |  |   | 387 |      |  |   | 17 |      
|Discontinued operations                                                                                   |                                                                                                |                                           |    |               |   |               |       |        |   |         |    |      |  |   |    |      |  |   | (5 | )    
|                                                                                                          |                                                                                                |                                           |     |               |   |               |        |        |   |         |     |      |  |   |     |      |  |   |    |      
|Net earnings (loss)  United States
    GAAP before cumulative effect of a change in accounting principle |                                                                                                |                                           | 95  |               |   |               | (2,076 | )      |   |         | 272 |      |  |   | 387 |      |  |   | 12 |      
|Cumulative effect of a change in accounting
    principle                                                 |                                                                                                |                                           | (17 | )             |   |               | (2     | )      |   |         |    |      |  |   |    |      |  |   |   |      
|                                                                                                          |                                                                                                |                                           |     |               |   |               |        |        |   |         |     |      |  |   |     |      |  |   |    |      
|Net earnings (loss)  United States GAAP                                                                  |                                                                                                | $                                         | 78  |               |   | $             | (2,078 | )      |   | $       | 272 |      |  | $ | 387 |      |  | $ | 12 |      
|                                                                                                          |                                                                                                |                                           |     |               |   |               |        |        |   |         |     |      |  |   |     |      |  |   |    |      
|Net earnings (loss) per share  Basic                                                                     |                                                                                                |                                           |     |               |   |               |        |        |   |         |     |      |  |   |     |      |  |   |    |      
|                                                                                                          | Net earnings (loss) per share before cumulative
    effect of a change in accounting principle |                                           | $   | 0.40          |   |               | $      | (11.50 | ) |         | $   | 1.35 |  |   | $   | 1.99 |  |   | $  | (0.05 | )
|                                                                                                          | Cumulative effect of a change in accounting
    principle                                      |                                           |     | (0.09         | ) |               |        | (0.01  | ) |         |     |     |  |   |     |     |  |   |    |      |  
|                                                                                                          |                                                                                                |                                           |     |               |   |               |        |        |   |         |     |      |  |   |     |      |  |   |    |      
|                                                                                                          | Net earnings (loss) per share  Basic                                                          |                                           | $   | 0.31          |   |               | $      | (11.51 | ) |         | $   | 1.35 |  |   | $   | 1.99 |  |   | $  | (0.05 | )
|                                                                                                          |                                                                                                |                                           |     |               |   |               |        |        |   |         |     |      |  |   |     |      |  |   |    |      
|Net earnings (loss) per share  Diluted                                                                   |                                                                                                |                                           |     |               |   |               |        |        |   |         |     |      |  |   |     |      |  |   |    |      
|                                                                                                          | Net earnings (loss) per share before cumulative
    effect of a change in accounting principle |                                           | $   | 0.39          |   |               | $      | (11.50 | ) |         | $   | 1.33 |  |   | $   | 1.99 |  |   | $  | (0.05 | )
|                                                                                                          | Cumulative effect of a change in accounting
    principle                                      |                                           |     | (0.09         | ) |               |        | (0.01  | ) |         |     |     |  |   |     |     |  |   |    |      |  
|                                                                                                          |                                                                                                |                                           |     |               |   |               |        |        |   |         |     |      |  |   |     |      |  |   |    |      
|                                                                                                          | Net earnings (loss) per share  Diluted                                                        |                                           | $   | 0.30          |   |               | $      | (11.51 | ) |         | $   | 1.33 |  |   | $   | 1.99 |  |   | $  | (0.05 | )
|                                                                                                          |                                                                                                |                                           |     |               |   |               |        |        |   |         |     |      |  |   |     |      |  |   |    |      



---



|    |                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain information for the year 1999 has been
    restated to reflect the retroactive application of the asset and
    liability method to calculate deferred income and mining taxes.
|(2) | Reference is made to Note 2 to the financial
    statements under Item 8 of this Report.                                                                                               

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The selected financial data item Preferred
shares would be reported in the same amounts under
Canadian and United States GAAP. Under United States GAAP,
convertible debt would be classified as debt and the selected
financial data item Long-term debt would be
increased by $626 million at December 31, 2003. Under
United States GAAP, Total assets would be reported
as $8,144 million at December 31, 2003 at
December 31, 2002 (2002  $7,691 million;
2001  $9,417 million; 2000 
$9,640 million; 1999  $9,533 million).

89



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|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and
    Results of Operations



Overview

The following Managements Discussion and
Analysis of Financial Condition and Results of Operations
(MD&A) should be read in conjunction with our
2003 consolidated financial statements and notes, which are
expressed in U.S. dollars and prepared in accordance with
Canadian generally accepted accounting principles
(GAAP), which generally conform with those
principles established in the United States, except as explained
in note 23 to our 2003 consolidated financial statements.
This MD&A contains certain forward-looking statements based
on our current expectations. These forward-looking statements
entail various risks and uncertainties, as discussed below,
which could cause actual results to differ materially from those
reflected in these forward-looking statements. Reference is also
made to the Cautionary Statement Regarding Forward-Looking
Statements above. This MD&A includes the following
sections in addition to this Overview:



| |   |                                            
| | - | -------------------------------------------
| |  | Results of Operations                      
|
| |  | Cash Flows, Liquidity and Capital Resources
|
| |  | Risks and Uncertainties                    
|
| |  | Sensitivities                              
|
| |  | Critical Accounting Policies and Estimates 
|
| |  | Accounting Changes                         
|
| |  | Outlook                                    
|
| |  | Non-GAAP Financial Measure                 






| |                       
| | ----------------------
| | Nature of our Business

We are a leading producer of nickel, a hard,
malleable metal which, given its properties and wide range of
applications, can be found in thousands of products. The largest
end use for nickel is in the production of austenitic or
nickel-bearing stainless steels. This end use currently accounts
for about two-thirds of demand for primary nickel, which we
define to be nickel produced from nickel-containing ores. We are
also an important producer of copper, precious metals and cobalt
and a major producer of value-added specialty nickel products.
Our principal mines and processing operations are located in the
Sudbury area of Ontario, the Thompson area of Manitoba and,
through a subsidiary in which we have an equity interest of
61 per cent, PT International Nickel Indonesia Tbk
(PT Inco), on the island of
Sulawesi, Indonesia. We have additional wholly-owned metals
refineries at Port Colborne, Ontario and in the United Kingdom
at Clydach, Wales and Acton, England. We also have interests in
nickel refining capacity in Japan, through contractual
arrangements with Inco TNC Limited, in which we have an equity
interest of 67 per cent, in Taiwan, through Taiwan Nickel
Refining Corporation, in which we have an equity interest of
49.9 per cent, and in South Korea, through Korea Nickel
Company, in which we have an equity interest of 25 per
cent. We also have a 65 per cent equity interest in Jinco
Nonferrous Metals Co., Ltd., a company that produces
nickel salts for plating and other applications at a plant near
Shanghai in the Peoples Republic of China
(China). We are currently in the process of
expanding our commercial relationships in China through the
participation in a venture that plans to produce nickel foam
products for the Asian battery market beginning in 2004. We have
been evaluating other commercial relationships in China and in
early March 2004 we started up a shearing and packaging
operation for certain nickel products to service the specific
needs of this market.

Our business operations consist of two segments,
our (i) finished products segment, representing our mining
and processing operations in Ontario and Manitoba, our refining
operations in the United Kingdom and interests in the refining
operations in Japan and other Asian countries referred to above,
and (ii) intermediates segment, which represents
PT Incos mining and processing operations in
Indonesia, where nickel-in-matte, an intermediate product, is
produced and sold primarily into the Japanese market. In
addition, as part of our strategy to be the worlds lowest
cost and most profitable nickel producer, we are currently
developing or plan to develop two major new or so-called
greenfield projects, our wholly-owned Voiseys
Bay nickel-copper-cobalt project in the

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Province of Newfoundland and Labrador and our
approximately 85 per cent-owned Goro nickel-cobalt project
in the French overseas territorial community
(collectivité territoriale) of New Caledonia
(New Caledonia). A number of risks and uncertainties
are associated with the current development or planned
development of these projected low-cost sources of nickel and
other metals, including political, regulatory, design,
construction, labour, operating, technical and technological
risks, uncertainties relating to capital and other costs and
financial risks and, in the case of Goro, those risks related to
the possible future transition to independence of New Caledonia.
Reference is made to Risks and Uncertainties 
Other Risks and Uncertainties and Outlook
below in this MD&A. As noted below under Results of
Operations  2002 Compared with 2001  Goro
Project Suspension Costs, in early December 2002 we
initiated a comprehensive review of the Goro project and that
review, being conducted in two phases, continued in 2003. The
initial phase of this review was completed in July 2003 and the
second phase is currently expected to be completed in the summer
of 2004.


In recent years, sales of our primary metal
products were concentrated in the United States, Europe, Japan,
elsewhere in Asia, and Canada, with about 66 per cent of
our 2003 revenues from nickel derived from sales of our nickel
products in Asia.






| |                                       
| | --------------------------------------
| | Key Factors Affecting our
    Business

The price of nickel has represented, and is
currently expected to continue to represent, the principal
determinant of our profitability and cash flows from operations.
Accordingly, our financial performance has been, and is expected
to continue to be, closely linked to the price of nickel and, to
a lesser extent, the price of copper and other primary metals
produced by us. Historically, the demand for nickel has been
closely correlated to industrial production in the major
industrialized regions, in particular North America and Europe
and more recently Asia, and we expect this positive correlation
to continue. During 2003 we experienced, and currently expect to
continue to experience at least in 2004 and 2005, very
favourable realized prices for the nickel products we produce
based upon the relationship between global nickel supply and
demand given that global nickel supply is not expected to keep
pace with global nickel demand. Accordingly, we expect that the
global nickel market will experience shortages in nickel supply
relative to demand which we believe will, in turn, affect nickel
prices in at least 2004 and 2005. In 2003, our average realized
price for the nickel products we sold was $9,860 per tonne
($4.47 per pound), compared with $7,143 per tonne
($3.24 per pound) for 2002. The London Metal Exchange
(LME) cash price for nickel, the price that is
generally viewed as the benchmark price for nickel, averaged
$9,633 per tonne ($4.37 per pound) in 2003 compared
with $6,775 per tonne ($3.07 per pound) in 2002.

Since we sell our nickel products in all major
geographical markets, the realized prices for our primary nickel
and other metal products are influenced by both global and
regional supply-demand factors and by the availability and
prices of secondary or metal-containing scrap material,
including nickel-containing scrap generated by the stainless
steel industry and other substitute or competing commodity
products for the primary nickel and other metal products we
produce. We believe that the growth in nickel demand in Asia,
and in particular China, has been the most important factor in
the rise in our realized nickel prices and the LME cash nickel
price in 2003. We currently expect this growth to continue to
affect nickel demand and nickel prices for the next couple of
years. If demand for nickel in Asia, and in particular China,
were to decline significantly, such an event would be expected
to significantly affect nickel prices and our results of
operations, financial condition, profitability and cash flows.
To the extent that, given the positive correlation that has
existed historically between demand for nickel and industrial
production, other industrialized regions of the world were to
experience slower economic growth or an actual decline in
economic growth, such a development would also be expected to
affect nickel prices and our results of operations, financial
condition, profitability and cash flows. We have experienced
periods of low nickel prices due to over-supply conditions
and/or declines in nickel demand and, given the historically
cyclical nature of nickel supply and demand, we expect that
similar periods could reoccur in the future which could result
in our experiencing unfavourable results of operations,
including net losses and negative cash flows.

While global demand for nickel is the most
important determinant of our profitability and cash flows, our
financial results are also very much affected by increases in
the costs we incur to produce nickel and our other metals. In
2002 and 2003, we experienced increases in our costs due to a
number of factors, including rising energy and pension expenses,
and in the case of 2003, the relative strengthening of the
Canadian dollar to the

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U.S. dollar and the effect this has had on
our operating costs incurred in Canadian dollars. While we have
continued to implement programs designed to manage our costs,
our ability to successfully do so will influence our
profitability and cash flows.


As discussed above, we have been moving forward
with our two key development projects. In 2003, we spent
approximately $138 million on the initial phase of our
Voiseys Bay project, which phase consists of an open pit
mine, concentrator and related facilities and certain research
and development and other programs, and currently expect to
spend approximately $430 million on this initial phase in
2004. We expect to make a decision by the summer of 2004 on
whether, and how, we will proceed with our Goro project.
Assuming that we do reach a decision to proceed with this
project in the summer of 2004, after the second phase of the
comprehensive review of our Goro project is completed, we could
be spending approximately $220 million in 2004 on this
project. These development projects are very important to our
future given that the Voiseys Bay project represents a key
source of intermediate product for our Manitoba and Ontario
operations for the 2006-2011 period and these projects will be
needed if we are to remain a leading nickel producer in an
expected growing nickel market. If there are significant delays
in when these projects are completed and are producing on a
commercial and consistent scale, and/or their capital costs were
to be significantly higher than estimated, these events could
have a significant adverse effect on our profitability and cash
flows.

We currently plan to rely, at least in part, on
and accordingly, need to generate, very substantial cash flows
to meet our sustaining capital expenditure requirements and the
planned capital expenditures for our development projects. Our
planned capital expenditures are expected to total
$1,040 million in 2004. If we do not realize satisfactory
prices for the nickel and other metals that we produce, we would
need to raise very significant additional capital through the
capital markets and/or incur significant borrowings to meet our
capital requirements. These financing requirements could
adversely affect our credit ratings and our ability to access
the capital markets in the future to meet any external financing
requirements we might have.

Until we are able to produce intermediate
products from our Voiseys Bay project for further
processing at our Canadian operations, our Canadian operations,
in particular, our Manitoba operations, will remain increasingly
dependant, in order to continue to produce nickel products at,
or close to, their capacity, on purchases of intermediate
products principally from two Australian companies. If these
suppliers experienced problems in producing or shipping to
Canada their intermediate products, these events would have an
adverse effect on our ability to produce and sell the nickel
products we plan to produce at least in 2004 and 2005 and would
adversely affect our results of operations, financial condition,
profitability and cash flows. Extended strikes, such as the one
we experienced at our Ontario operations in 2003, other labour
disruptions and unforeseen events could also adversely affect
our production plans and costs and these developments could also
adversely affect our results of operations, financial condition,
profitability and cash flows.

Given the nature of our business, compliance with
environmental regulations is very important to our operations.
To the extent that there are changes in environmental
regulations beyond those currently in effect which are
applicable to our operations and these changes require further
reductions in emissions beyond what our operations are currently
required to meet, such developments could require a reduction in
our production levels and/or significant additional capital
expenditures to meet such requirements. These developments could
be expected to also adversely affect our ability to finance any
such required capital expenditures and our other capital
requirements as well as our results of operations, financial
condition, profitability and cash flows.

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The following table shows our average realized
price for nickel, the average LME cash nickel price and our net
earnings (loss) for each of the past ten years to illustrate the
correlation between nickel prices and our financial results:

|     |  |                     |       |               |  |                 |       |  |  |  |        |     
|---- |  | ------------------- | ----- | ------------- |  | --------------- | ----- |  |  |  | ------ | ----
|     |  | Inco                |       | Average       |  |                
|     |  | Average Realized    |       | LME Cash      |  | Net Earnings   
|Year |  | Price for Nickel(1) |       | Nickel Price  |  | (Loss)(6)      
|     |  |                     |       |               |  |                
|     |  | ($ per tonne)       |       | ($ per tonne) |  | ($ in millions)
|1994 |  |                     | 6,614 |               |  |                 | 6,342 |  |  |  | 7      |     
|1995 |  |                     | 8,510 |               |  |                 | 8,231 |  |  |  | 227    |     
|1996 |  |                     | 7,959 |               |  |                 | 7,504 |  |  |  | 179    |     
|1997 |  |                     | 7,407 |               |  |                 | 6,930 |  |  |  | 75     | (2) 
|1998 |  |                     | 5,291 |               |  |                 | 4,633 |  |  |  | (103   | )   
|1999 |  |                     | 6,415 |               |  |                 | 6,015 |  |  |  | 12     | (3) 
|2000 |  |                     | 9,007 |               |  |                 | 8,642 |  |  |  | 400    |     
|2001 |  |                     | 6,468 |               |  |                 | 5,948 |  |  |  | 304    |     
|2002 |  |                     | 7,143 |               |  |                 | 6,775 |  |  |  | (1,482 | )(4)
|2003 |  |                     | 9,860 |               |  |                 | 9,633 |  |  |  | 137    | (5) 



---



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | Includes intermediates.                                                                                      
|(2) | Reflects a one-month strike at our Ontario
    operations.                                                   
|(3) | Reflects a three-month strike at our Manitoba
    operations.                                                
|(4) | Reflects non-cash asset impairment charges of
    $2,415 million and related tax relief of $789 million.     
|(5) | Reflects a three-month strike at our Ontario
    operations.                                                 
|(6) | 2001-2003 reflects restated results as discussed
    in note 2 to our 2003 consolidated financial statements.

The nickel industry is highly competitive in all
of its key aspects, including the exploration for, and the
development of, new sources of supply, the acquisition of
deposits, and the processing, distribution and marketing of
nickel products. The level of production and export of primary
nickel from the Russian Federation (Russia) as well
as the supply of nickel-containing scrap material, together with
the continuing relatively limited level of domestic consumption
of nickel in Russia since the break-up of the former Soviet
Union, has had, and could continue to have, a significant impact
on the nickel industrys supply-demand balance. While we
produce primary nickel, the other type of nickel used in
industrial applications is known as secondary
nickel, which is also referred to as recycled or scrap nickel.
Secondary nickel units are recovered largely from austenitic
stainless steel manufacturing and fabricating operations and
nickel-containing scrap from obsolete facilities and equipment.
In the recent past, secondary nickel has represented between 44
and 48 per cent of the total nickel used in the production
of nickel-bearing or austenitic stainless steels, with primary
nickel accounting for between 52 and 56 per cent of such
nickel use. These percentages can vary based upon relative
prices, the availability of scrap and other factors. To the
extent that the supply of such secondary nickel increases, such
an occurrence could also adversely affect nickel prices and our
results of operations, financial condition, profitability and
cash flows.

With the increase in nickel prices experienced in
2003, the nickel industry has seen some substitution of other
less costly metals or materials for nickel in certain
applications. Any significant increases in such substitution,
particularly if such changes represented a permanent shift away
from the use of nickel, would be expected to adversely affect
nickel demand and our results of operations, financial
condition, profitability and cash flows.






| |                
| | ---------------
| | 2003 Highlights

The year 2003 was one of significant improvement
in the world nickel market. We believe that the increase in the
LME cash price for nickel for 2003 was principally due to
continued strong and growing demand for nickel and
nickel-containing materials in Asia, in particular China, and
the continued significant growth in world stainless steel
production. The global nickel market was essentially in balance
for 2003 as a result of the release into the market of
approximately 60,000 tonnes (132 million pounds) of
nickel or about five per cent of total global nickel supply that
we understand one leading nickel producer had initially pledged
as collateral for a loan.

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We experienced a three-month strike at our
Ontario operations which began June 1, 2003. Prior to the
strike, all of our principal operations were operating above
planned production levels for 2003. Operating costs continued to
represent a major challenge for us in 2003 due to a stronger
Canadian dollar, higher energy costs, increased pension expense,
higher costs for purchased intermediates and lower by-product
credits. Many of these cost pressures are expected to continue
in 2004. We faced three key production challenges in 2003 in
addition to the strike in Ontario and the ramp-up problems
experienced when production resumed after the strike in
September 2003; lower ore grades in Canada, in particular at our
Manitoba operations; adverse smelter performance at our Manitoba
operations due to the processing of ores with higher magnesium
oxide content, and reaching or exceeding PT Incos
expanded production design capacity. Two of these challenges
were successfully met. At our Manitoba operations, we modified
certain facilities to address the higher magnesium oxide content
of this operations Birchtree mine ore, resulting in
improved concentrate grade with no loss in recoveries. At
PT Inco, we produced a record 70,200 tonnes
(155 million pounds) of nickel-in-matte in 2003, exceeding
PT Incos production design capacity of
68,000 tonnes (150 million pounds) despite completion
of a planned furnace rebuild in the first six weeks of the year.
In 2003, improved mining and blending practices raised the ore
grade at PT Inco to 1.84 per cent from 1.77 per
cent in 2002. Furnace throughput at PT Inco also improved
based on these better ore blending practices and higher grades.
At PT Inco we also increased power available to improve
throughput by enabling all five hydroelectric generators to feed
all furnaces. We were able to resolve the ramp-up issues
encountered at our Ontario operations following the three-month
strike and operations were on track in the fourth quarter of
2003.

We made satisfactory progress on our two
development projects in 2003. At our Voiseys Bay project,
in March 2003 we completed a bankable feasibility study for the
mine and concentrator and related facilities currently planned
as part of the projects initial phase. In July 2003, we
began construction of the initial phase of the project and
construction proceeded on schedule and on budget in Canadian
dollars in 2003. At our Goro project, we made good progress on
the comprehensive review initiated following suspension of the
project in December 2002. We currently expect to complete Phase
Two of this review and to announce our decision as to whether or
not we will proceed with this project in the third quarter of
2004.

We significantly improved our financial position
in 2003 through a number of financings. We raised
$776 million in the capital markets in 2003 at attractive
interest rates and used the proceeds plus cash on hand to redeem
or prepay approximately $955 million in relatively high
cost preferred shares and debentures. Through these financings,
we significantly reduced our cost of debt and have extended our
average debt maturities from 7 to 15 years, with no
significant debt securities maturing until beyond the currently
planned construction and start-up phases of the Voiseys
Bay and Goro projects.

The global nickel market reflected favourable
fundamentals for nickel producers such as ourselves in 2003 as
world demand grew by approximately seven per cent from 2002
levels to 1,251,000 tonnes despite continued economic
weakness in Europe and a delayed economic recovery in the United
States. Industrial production in Asia grew during 2003, led by
continued significant growth in China, as well as growth in
South Korea, Taiwan and Japan.

The growth in nickel demand in 2003 was
concentrated in the stainless steel sector, the largest end use
of primary nickel. Nickel demand growth in this sector increased
by almost eight per cent in 2003, driven by a significant
increase in stainless steel production and a decline in the
stainless steel scrap-ratio. The world production of stainless
steel increased by nine per cent to approximately
22 million tonnes in 2003. This growth was due, in
part, to increases in production capacity and the start-up of
several new large-scale stainless steel manufacturing facilities
around the world. Stainless steel production expanded in all
major industrial regions and was particularly strong in China
and South Korea where new production facilities were
commissioned during the year. Nickel demand growth in
non-stainless steel applications was relatively weak in 2003, as
one important end-use market, high nickel alloys for the
aerospace industry, continued to struggle with new aircraft
orders remaining at relatively depressed levels. However, demand
for nickel in plating applications was relatively strong, led by
growth in these applications in China, slightly offset by
reduced demand for these applications in Europe and the United
States.

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The growth in world supply of primary nickel in
2003 could not keep pace with the demand growth experienced in
2003. Supply of primary nickel in 2003 was adversely affected by
the labour disruption at our Ontario operations during a
three-month period beginning June 1, 2003 which resulted in
effectively no production from these operations which would
normally produce about 20 million pounds of primary nickel
per month. We believe that several other major producers failed
to reach their 2003 projected production targets due to
unexpected maintenance or operational problems. The shortfall in
supply was partially offset by the release of approximately
60,000 tonnes into the market during 2003, as discussed
above. In addition, production of ferronickel in Australia, New
Caledonia, Colombia and the Dominican Republic increased in
2003. As a result, world primary nickel production increased by
21,500 tonnes to 1,192,000 tonnes in 2003. World
primary nickel supply increased to 1,252,000 tonnes taking
into account the release of the 60,000 tonne loan collateral
mentioned above.

The significant growth in nickel demand during
2003, coupled with the limited supply growth, created an
underlying deficit between supply and demand in 2003 of
approximately 59,000 tonnes. With the release of the
60,000 tonne loan collateral referred to above, we believe
there was a small surplus in the global nickel market of
approximately 1,000 tonnes in 2003. Inventories of nickel
on the LME, a physical market (i) where various metals,
including nickel, can be bought or sold for prompt or future
delivery and (ii) representing the principal terminal
market for primary nickel in the world, increased slightly
during 2003 by 2,100 tonnes, remaining at a relatively low
level of 24,072 tonnes at December 31, 2003. As of
March 12, 2004, LME inventories totalled 14,316 tonnes.

The LME cash nickel price opened the year 2003 at
$7,210 per tonne ($3.27 per pound) and extended the
gains made in 2002 by increasing relatively steadily throughout
the year. We believe that several major events influenced the
nickel price during 2003. During the first quarter, nickel
prices initially rose due to strong demand from the stainless
steel industry and a reduction in LME inventories. However,
prices by the beginning of March weakened with the initial
release of a portion of the 60,000 tonne loan collateral
into the market. During the second quarter, speculation that a
strike at our Ontario operations could occur followed by the
actual strike was a contributing factor in the movement of the
nickel price to over $9,500 per tonne ($4.31 per
pound) and, we believe, spurred the release into the market of
18,000 tonnes from the 60,000 tonne loan collateral
position. The announcement of releases of the remaining tonnage
of this collateral position was, we believe, sufficient to cause
the LME price to fall below $8,500 per tonne
($3.86 per pound) at the end of the second quarter. The
extended strike at our operations during the third quarter,
accelerating demand and the fall in LME inventories, we believe,
caused an increase in the nickel price to above $10,000 per
tonne ($4.54 per pound) for the first time in over three
years, prompting, we believe, the release of the balance of the
60,000 tonne loan collateral over a relatively short period
of time in the third quarter. The release of the balance of the
loan collateral position had little impact on the nickel price,
apparently reflecting the belief that strong demand growth would
continue and the fact that there was a lack of major new sources
of nickel to provide additional supply for at least the next few
years. During the fourth quarter of 2003, we believe that the
market perception was that strong supply-demand fundamentals
were taking hold and that the market would see a significant
deficit for several years. We believe that these factors
resulted in the LME cash price by the end of 2003 reaching
$16,650 per tonne ($7.55 per pound), an increase of
135 per cent compared with $7,100 per tonne
($3.22 per pound) at the end of 2002. As of March 12,
2004, the LME cash nickel price declined to $12,875 per
tonne ($5.84 per pound). This decline in price early in
2004 was, we believe, related to the speed and extent to which
prices had increased at the end of 2003 and was exacerbated by a
lack of liquidity on the LME.

An uncertain global economic environment would be
expected to have a significant adverse effect on our business,
results of operations, financial condition, profitability and
cash flows given the historical correlation between industrial
production and demand for primary nickel and the other products
we produce. There can be no assurance that over-supply
situations that existed in the past in the nickel markets could
not reoccur in the future. Any excess supply condition would
have an adverse effect on the prices realized by us for our
nickel products. Other international economic trends,
expectations of inflation and political events in major nickel
producing and consuming countries could also adversely affect
nickel prices and the prices of other metals produced by us.
These factors are beyond our control and have resulted, and are
expected to continue to result, in a high degree of price
volatility for nickel and other primary metals produced by us.

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There can be no assurance that the price for
nickel or other metals produced by us will not decline
significantly from current levels. A return to the relatively
low price of nickel reflected by the LME cash nickel price which
prevailed throughout most of 1998 and into the first half of
1999 when the LME cash nickel price reached a low of
$3,725 per tonne ($1.69 per pound) in December 1998,
as a result of the decrease in nickel demand experienced in 1998
and the expected increase in nickel supply to be brought into
the market from three new Australian laterite nickel projects
that had been developed, and during a portion of the second half
of 2001 when the LME cash nickel price was as low as
$4,420 per tonne ($2.00 per pound) in October 2001,
would have a material adverse effect on our results of
operations, financial condition, profitability and cash flows.

The following table summarizes certain world
primary nickel market and LME statistics for the years indicated
(in tonnes, except prices):

|     |  |               |           |               |  |                   |           |              |  |                 |         |     |  |  |        |  |  |   |       | 
|---- |  | ------------- | --------- | ------------- |  | ----------------- | --------- | ------------ |  | --------------- | ------- | --- |  |  | ------ |  |  | - | ----- | 
|     |  |               |           |               |  | Year-End Combined |           |              |  |                
|     |  | World Primary |           |               |  | Western World(2)  |           |              |  | Average Annual 
|     |  | Nickel        |           | World Primary |  | Producers and     |           | Year-End LME |  | LME Cash Nickel
|Year |  | Demand        |           | Nickel Supply |  | LME Inventories   |           | Inventories  |  | Prices         
|     |  |               |           |               |  |                   |           |              |  |                
|1999 |  |               | 1,048,000 |               |  |                   | 1,027,000 |              |  |                 | 120,000 |     |  |  | 46,962 |  |  | $ | 6,015 | 
|2000 |  |               | 1,109,000 |               |  |                   | 1,105,000 |              |  |                 | 90,000  |     |  |  | 9,678  |  |  |   | 8,642 | 
|2001 |  |               | 1,085,000 |               |  |                   | 1,145,000 |              |  |                 | 106,000 |     |  |  | 19,188 |  |  |   | 5,948 | 
|2002 |  |               | 1,168,000 |               |  |                   | 1,171,000 |              |  |                 | 100,000 |     |  |  | 21,972 |  |  |   | 6,775 | 
|2003 |  |               | 1,251,000 | (1)           |  |                   | 1,192,000 | (1)          |  |                 | 104,000 | (1) |  |  | 24,072 |  |  |   | 9,633 | 



---

|    |                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------
|(1) | Preliminary estimates.                                                                                                  
|(2) | Excludes Russia, other members of the former
    Commonwealth of Independent States, China, Cuba and Eastern
    Europe.






| |                
| | ---------------
| | 2002 Highlights

The world(9) nickel market
strengthened in 2002 as demand grew by approximately eight per
cent during the year to 1,168,000 tonnes despite continued
weakness in certain large segments of the global economy. During
2002, growth in industrial production continued in China and
rebounded in most other major Asian economies, excluding Japan,
while economic recovery in the United States, Europe and Japan
struggled to take hold.

The growth in nickel demand was primarily
concentrated in the stainless steel sector. Nickel demand growth
in this sector increased by almost 10 per cent, driven by
an increase in stainless steel production and a decline in the
proportion or ratio of nickel-containing stainless steel scrap
relative to primary nickel to the total nickel consumed by
stainless steel producers. Stainless steel production increased
by 7.9 per cent to approximately 20.3 million tonnes,
with growth experienced in all major industrialized countries of
the world except Japan where production declined slightly. This
production growth was particularly strong in the United States,
up 20 per cent, driven by the opening of a new 800,000
tonne-per-year stainless steel production facility in Kentucky
and higher production at existing facilities elsewhere in the
United States and in Taiwan, where production increased by
20 per cent as existing facilities operated at
near-capacity levels.

Growth in primary nickel supply continued in 2002
as several relatively new or greenfield projects
located in South America and Australia continued to increase
production to their expected design capacities. Primary nickel
production on a global basis increased by 25,800 tonnes to
1,171,000 tonnes in 2002. The overall increase in nickel supply
in 2002 came principally from (i) Colombia and Venezuela,
where new or greenfield projects were completing
their ramp-up to their design capacities, (ii) Australia,
where production increased from the continued ramp-up of one
project and higher production from certain existing producers,
and (iii) Japan, where production in the form of
ferronickel rebounded to near-capacity levels.

The strong growth in nickel demand during 2002
largely offset the growth in nickel production, resulting in an
essentially balanced market for 2002 as we estimate that the
market had a small surplus of approximately



---

|    |                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(9) | Previously disclosed figures for 2002 were
    provided on a Western World-plus-China basis where we defined
    Western World as being the world excluding the
    former East Bloc countries (Russia and other members of the
    former Commonwealth of Independent States, China, Cuba,
    Bulgaria, the Czech Republic, Slovakia, Hungary, Poland and
    Romania).

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3,000 tonnes. Inventories of nickel on the LME
increased slightly during 2002 by 2,784 tonnes, remaining at a
relatively low level of 21,972 tonnes at December 31, 2002.


The LME cash nickel price opened the year at
$5,850 per tonne ($2.65 per pound) and increased
during the first half of 2002 as the economies of certain
industrialized countries began to recover from their relatively
low fourth quarter 2001 levels, ending the first half of the
year at $7,080 per tonne ($3.21 per pound). Prices
declined through the third quarter to the mid-$6,000 per
tonne level as concern over the pace of economic recovery and
uncertainty about a potential war with Iraq adversely affected
the nickel markets. Prices increased in the fourth quarter,
underpinned by improving fundamentals for nickel, ending the
year at $7,100 per tonne ($3.22 per pound).




Results of Operations



2003 Compared
with 2002





| |                 
| | ----------------
| | Earnings Summary

Net earnings for 2003 were $137 million, or
59 cents per share (58 cents per share on a diluted
basis), compared with a net loss of $1,482 million, or
$8.27 per share ($8.27 per share on a diluted basis),
in 2002. Results for 2003 included income tax benefits totalling
$94 million and the following items, before taxes:
(1) unfavourable non-cash currency translation adjustments
of $177 million, (2) income of $24 million
representing a milestone payment received as part of the terms
of the sale of a non-core exploration property in 1998,
(3) a charge of $23 million for estimated remediation
costs for certain former industrial sites in the United States
we retained relating to a business sold in 1983,
(4) expense of $107 million associated with the
three-month strike at our Ontario operations, (5) currency
hedging gains net of suspension costs relating to the Goro
project of $15 million, (6) income of $7 million
associated with a tax refund and (7) a loss of
$2 million realized on the redemption of certain
convertible debt securities. In addition, with respect to only
the calculation of net earnings per share for 2003, a premium of
$15 million was paid on the May 1, 2003 redemption of
our 5.5 per cent Convertible Redeemable Preferred Shares
Series E (Preferred Shares Series E). The
unfavourable non-cash currency translation adjustments of
$177 million in 2003 referred to above were due to the
effect of a significant strengthening of the Canadian dollar
relative to the U.S. dollar during the period on Canadian
dollar-denominated liabilities. The income tax benefits
totalling $94 million are discussed under Income and
Mining Taxes below. The strike expenses referred to above
are those ongoing costs, such as salaries and certain employment
benefits, depreciation, property taxes, utilities and
maintenance incurred during the strike period, in this case, the
three-month strike at our Ontario operations which began on
June 1, 2003, which would normally be treated as production
costs and charged to inventory but, in the absence of
production, have been expensed. Results for 2002 included
non-cash pre-tax asset impairment charges of $2,415 million
to reduce the carrying value of the Voiseys Bay project
and certain other assets, suspension costs relating to the Goro
project of $25 million, interest income of $14 million
associated with a tax refund and unfavourable non-cash currency
translation adjustments of $5 million.






| |                  
| | -----------------
| | Nickel Production

Nickel production decreased by 11 per cent
to 187,173 tonnes (413 million pounds) in 2003, compared
with 209,728 tonnes (462 million pounds) in 2002,
reflecting lower production at our Ontario operations due to the
strike and the ramp-up problems noted above, partially offset by
higher production at our Manitoba operations, the processing of
higher volumes of purchased intermediates at both the Ontario
and Manitoba operations and higher ore grades and higher
production levels at PT Inco. Our 2002 results were also
negatively impacted by a planned furnace rebuild at PT Inco
which resulted in lower production for this operation. Finished
nickel inventories were 25,604 tonnes at December 31, 2003,
compared with 23,126 tonnes at the end of 2002. The minimum
finished nickel inventories we generally need to run our
business and meet customers requirements have historically
been about 26,000 tonnes, depending upon the required product
mix.

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| |                  
| | -----------------
| | Copper Production

Copper production decreased by 18 per cent
to 91,134 tonnes in 2003 compared with 111,787 tonnes in 2002.
Copper production in 2003 was below our planned target of
113,000 tonnes due to lower production at the Ontario operations
as a result of the strike and ramp-up problems noted above.






| |          
| | ---------
| | Net Sales

Net sales for 2003 to customers increased by
14 per cent from the previous year due to significantly
higher average realized prices for nickel which were partially
offset by lower deliveries of nickel, platinum, palladium,
copper and cobalt, and lower realized prices for certain
platinum-group metals. The decrease in deliveries was primarily
due to lower production at our Ontario operations as a result of
the three-month strike which was partially offset by higher
nickel deliveries from PT Inco and our Manitoba operations and
an increase in the deliveries of purchased finished nickel.

Primary nickel sales increased by 28 per
cent in 2003 from the previous year due to a 38 per cent
increase in our average realized price partially offset by an
eight per cent decrease in nickel deliveries primarily due to
the three-month strike at our Ontario operations.

Our nickel deliveries in 2003 represented an
estimated 17 per cent share of the world nickel market,
compared with 20 per cent in 2002 and 21 per cent in
2001.

Our price realizations tend to lag LME cash price
changes. The premiums we realize over the prevailing LME cash
price for our specialty or value-added and other nickel products
are affected by (i) fluctuations in the LME cash nickel
price, (ii) the effect these fluctuations have on the price
we receive for the nickel-in-matte product produced by PT Inco,
(iii) the lag effect that changes in the LME benchmark
price have on the pricing of certain of our nickel products,
(iv) how certain of our speciality nickel products are
priced and (v) the mix of our primary nickel products sold in
the year. The average realized price for our primary nickel
products, including intermediates, was $9,860 per tonne
($4.47 per pound) in 2003, compared with $7,143 per
tonne ($3.24 per pound) in 2002. For the January
2  March 12, 2004 period, the LME cash nickel
price averaged $14,929 per tonne ($6.77 per pound).

The price realizations for our nickel and other
metal products generally reflect LME or other metal market
prices and, over the longer term, depend principally upon the
balance between demand for our primary nickel products in the
marketplace relative to supply available from us and our
competitors, including for this purpose, secondary or scrap
materials containing metals in usable or recyclable form and
supplies of other materials which do or may compete as
substitutes. As noted above, the availability of
nickel-containing stainless steel scrap, which competes directly
with primary nickel as a source of nickel for use in the
production of stainless steel, is particularly important to
stainless steel primary nickel demand. The stainless steel scrap
ratio was 44 per cent in 2003, compared with 45 per
cent in 2002 and 47 per cent in 2001.

In 2003, copper sales decreased by 7 per
cent from the previous year due to a 17 per cent decline in
deliveries due primarily to the three-month strike at our
Ontario operations, partially offset by a 12 per cent
increase in our average realized price. Sales of precious metals
decreased by 52 per cent in 2003 due to lower deliveries
from decreased production also due primarily to that three-month
strike.






| |                
| | ---------------
| | Realized Prices

The following table sets forth our average annual
realized prices for the years indicated for the metal products
we produce and sell:

|                                        |  |                         |             |      |  |      |             |  |  |   |              | 
|--------------------------------------- |  | ----------------------- | ----------- | ---- |  | ---- | ----------- |  |  | - | ------------ | 
|                                        |  | 2003                    |             | 2002 |  | 2001
|                                        |  |                         |             |      |  |     
|                                        |  |                        
|                                        |  | ($ per tonne/per pound)
|Primary nickel, including intermediates |  | $                       | 9,860/4.47  |      |  | $    | 7,143/3.24  |  |  | $ | 6,468/2.93   | 
|Copper                                  |  |                         | 1,832/0.83  |      |  |      | 1,629/0.74  |  |  |   | 1,668/0.76   | 
|Cobalt                                  |  |                         | 18,846/8.55 |      |  |      | 15,124/6.86 |  |  |   | 23,216/10.53 | 

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|          |  |                    |        |      |  |      |        |  |  |   |          | 
|--------- |  | ------------------ | ------ | ---- |  | ---- | ------ |  |  | - | -------- | 
|          |  | 2003               |        | 2002 |  | 2001
|          |  |                    |        |      |  |     
|          |  |                   
|          |  | ($ per troy ounce)
|Platinum  |  | $                  | 653.87 |      |  | $    | 545.92 |  |  | $ | 541.27   | 
|Palladium |  |                    | 202.69 |      |  |      | 419.70 |  |  |   | 711.32   | 
|Rhodium   |  |                    | 530.67 |      |  |      | 804.59 |  |  |   | 1,475.85 | 
|Gold      |  |                    | 366.15 |      |  |      | 309.17 |  |  |   | 270.50   | 
|Silver    |  |                    | 4.86   |      |  |      | 4.58   |  |  |   | 4.40     | 






| |                                    
| | -----------------------------------
| | Deliveries and Net Sales by Product

The following table sets forth deliveries and net
sales of our principal metal products for the years indicated:

|                                                  |             |            |         |              |  |            |       |              |  |            |         |              |  |   |       |  |  |  |         |         |  |   |       |  | 
|------------------------------------------------- | ----------- | ---------- | ------- | ------------ |  | ---------- | ----- | ------------ |  | ---------- | ------- | ------------ |  | - | ----- |  |  |  | ------- | ------- |  | - | ----- |  | 
|                                                  |             | Deliveries |         | Net Sales    |  | Deliveries |       | Net Sales    |  | Deliveries |         | Net Sales   
|                                                  |             | 2003       |         | 2003         |  | 2002       |       | 2002         |  | 2001       |         | 2001        
|                                                  |             |            |         |              |  |            |       |              |  |            |         |             
|                                                  |             | (tonnes)   |         | ($ millions) |  | (tonnes)   |       | ($ millions) |  | (tonnes)   |         | ($ millions)
|Primary nickel, including intermediates           |             |            |         |              |  |            |       |              |  |            |         |              |  |   |       |  |  |  |         |         |  |   |       | 
|                                                  | Inco-source |            |         | 184,110      |  |            |       |              |  |            |         | 212,247      |  |   |       |  |  |  |         | 207,071 |  |   |       |  | 
|                                                  | Purchased   |            |         | 29,780       |  |            |       |              |  |            |         | 19,343       |  |   |       |  |  |  |         | 22,978  |  |   |       |  | 
|                                                  |             |            |         |              |  |            |       |              |  |            |         |              |  |   |       |  |  |  |         |         |  |   |       | 
|                                                  |             |            | 213,890 |              |  | $          | 2,109 |              |  |            | 231,590 |              |  | $ | 1,654 |  |  |  | 230,049 |         |  | $ | 1,488 | 
|                                                  |             |            |         |              |  |            |       |              |  |            |         |              |  |   |       |  |  |  |         |         |  |   |       | 
|Copper                                            |             |            |         |              |  |            |       |              |  |            |         |              |  |   |       |  |  |  |         |         |  |   |       | 
|                                                  | Inco-source |            |         | 92,202       |  |            |       |              |  |            |         | 110,019      |  |   |       |  |  |  |         | 116,751 |  |   |       |  | 
|                                                  | Purchased   |            |         | 1,133        |  |            |       |              |  |            |         | 3,097        |  |   |       |  |  |  |         |        |  |   |       |  | 
|                                                  |             |            |         |              |  |            |       |              |  |            |         |              |  |   |       |  |  |  |         |         |  |   |       | 
|                                                  |             |            | 93,335  |              |  |            | 171   |              |  |            | 113,116 |              |  |   | 184   |  |  |  | 116,751 |         |  |   | 195   | 
|                                                  |             |            |         |              |  |            |       |              |  |            |         |              |  |   |       |  |  |  |         |         |  |   |       | 
|Cobalt                                            |             |            | 903     |              |  |            | 17    |              |  |            | 1,582   |              |  |   | 24    |  |  |  | 1,454   |         |  |   | 34    | 
|Precious metals (thousands of troy
    ounces)(1) |             |            | 1,694   |              |  |            | 114   |              |  |            | 2,072   |              |  |   | 238   |  |  |  | 2,021   |         |  |   | 292   | 
|Other                                             |             |            |         |              |  |            | 63    |              |  |            |         |              |  |   | 61    |  |  |  |         |         |  |   | 57    | 
|                                                  |             |            |         |              |  |            |       |              |  |            |         |              |  |   |       |  |  |  |         |         |  |   |       | 
|Net sales to customers                            |             |            |         |              |  | $          | 2,474 |              |  |            |         |              |  | $ | 2,161 |  |  |  |         |         |  | $ | 2,066 | 
|                                                  |             |            |         |              |  |            |       |              |  |            |         |              |  |   |       |  |  |  |         |         |  |   |       | 



---

|    |                                 
|--- | --------------------------------
|(1) | Excludes toll-refined materials.

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| |                                 
| | --------------------------------
| | Costs and Expenses/ Other Income

The following table sets forth our costs,
principal expenses, other income, income for mining taxes and
minority interest for the years indicated:

|                                           |  |              |       |               |  |               |       |   |  |   |       |  
|------------------------------------------ |  | ------------ | ----- | ------------- |  | ------------- | ----- | - |  | - | ----- | -
|                                           |  | 2003         |       | 2002          |  | 2001         
|                                           |  |              |       |               |  |              
|                                           |  |              |       | (Restated)(1) |  | (Restated)(1)
|                                           |  |             
|                                           |  | ($ millions)
|Cost of sales and other operating expenses |  | $            | 1,735 |               |  | $             | 1,378 |   |  | $ | 1,416 |  
|Depreciation and depletion                 |  |              | 265   |               |  |               | 255   |   |  |   | 263   |  
|Selling, general and administrative        |  |              | 169   |               |  |               | 136   |   |  |   | 111   |  
|Research and development                   |  |              | 27    |               |  |               | 17    |   |  |   | 20    |  
|Exploration                                |  |              | 27    |               |  |               | 24    |   |  |   | 23    |  
|Currency translation adjustments           |  |              | 177   |               |  |               | 5     |   |  |   | (39   | )
|Interest expense                           |  |              | 44    |               |  |               | 50    |   |  |   | 56    |  
|Asset impairment charges                   |  |              |      |               |  |               | 2,415 |   |  |   |      |  
|Goro project suspension costs              |  |              | (4    | )             |  |               | 25    |   |  |   |      |  
|Other income, net                          |  |              | (104  | )             |  |               | (40   | ) |  |   | (13   | )
|Income and mining taxes                    |  |              | (49   | )             |  |               | (639  | ) |  |   | (85   | )
|Minority interest                          |  |              | 50    |               |  |               | 17    |   |  |   | 10    |  



---

|    |                                                                               
|--- | ------------------------------------------------------------------------------
|(1) | Reference is made to Note 2 to our 2003
    consolidated financial statements.






| |                                               
| | ----------------------------------------------
| | Cost of Sales and Other Operating
    Expenses

Cost of sales and other operating expenses
increased by 26 per cent in 2003, reflecting the adverse
impact of a strengthening of the Canadian dollar relative to the
U.S. dollar on our costs incurred in Canadian dollars,
higher energy costs, higher employment and pension costs, and
increased costs for purchased intermediates processed. In
addition, deliveries of purchased finished nickel in 2003
increased by 54 per cent primarily due to increases in the
purchases of this material to meet customer requirements in the
face of the strike at our Ontario operations. The cost of these
purchases is based upon LME and other benchmark prices and is
included in cost of sales. Operating results for 2003 included a
pre-tax expense of $107 million associated with the
three-month strike at our Ontario operations. In addition,
during the third quarter of 2003 our Ontario operations
experienced a series of unanticipated problems associated with
the ramp-up of certain of its facilities after the strike. These
problems included outages or curtailments of operations at our
Ontario operations oxygen plants and acid plant. These
problems resulted in lower than planned production of in-process
and finished material, including platinum-group metals from our
own ores in Ontario, and an expense of $25 million was
incurred during the third quarter of 2003 due to this production
shortfall.






| |                           
| | --------------------------
| | Depreciation and Depletion

Depreciation and depletion expenses increased by
four per cent in 2003 primarily due to higher depletion expense
at PT Inco, partially offset by lower depletion expense at our
Ontario operations due to the strike. The increase in depletion
expense at PT Inco was due to higher production in 2003.

At December 31, 2003, the net carrying value
of property, plant and equipment under construction or
development not subject to depreciation or depletion was
$4,720 million (compared with $4,109 million in 2002
and $5,761 million in 2001) which consists of amounts for
(1) the Voiseys Bay project totalling
$3,777 million (compared with $3,299 million in 2002
and $5,492 million in 2001), (2) the Goro project of
$802 million (compared with $637 million in 2002 and
$180 million in 2001) and (3) other assets under
construction at our operations of $141 million (compared
with $173 million in 2002 and $89 million in 2001). It
is currently expected, assuming that a favourable decision will
be made in 2004 to proceed with the Goro project, that
depreciation and depletion for the Voiseys Bay and Goro
projects will commence in 2006, in line with the currently
projected start of commercial production at these projects.

100



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| |                                    
| | -----------------------------------
| | Selling, General and Administrative

Selling, general and administrative expenses
totalled $169 million in 2003 compared with
$136 million in 2002. The increase was primarily due to
higher common share appreciation rights expense in connection
with certain share option grants as a result of the significant
increase in the price of our common shares in 2003. Common share
appreciation rights expense was $36 million in 2003
compared with $7 million in 2002. Selling, general and
administrative expense also included certain expenditures
totalling approximately $10 million in both 2003 and 2002
in support of our Goro and Voiseys Bay projects.






| |                         
| | ------------------------
| | Research and Development

Research and development expenses increased to
$27 million in 2003 from $17 million in 2002. The
increase was primarily due to higher spending on the
hydrometallurgical processing research and development program
as part of the initial phase of our Voiseys Bay project.






| |            
| | -----------
| | Exploration

Exploration expenses totalled $27 million in
2003 compared with $24 million in 2002. The increase is
primarily due to higher exploration activities in New Caledonia.






| |                                 
| | --------------------------------
| | Currency Translation Adjustments

Currency translation adjustments represented
primarily the effect of exchange rate movements on the
translation of Canadian dollar-denominated liabilities,
principally post-retirement benefits, accounts payable and
deferred income and mining taxes, into U.S. dollars.
Unfavourable currency translation adjustments of
$177 million in 2003 were due to the significant
strengthening of the Canadian dollar relative to the
U.S. dollar during these periods. The Canadian
dollar  U.S. dollar exchange rate was 0.633 at
year end 2002 and 0.774 at year end 2003, representing
approximately a 22 per cent appreciation in the Canadian
dollar relative to the U.S. dollar on a year-to-year basis.






| |                 
| | ----------------
| | Interest Expense

Interest expense for 2003 was $44 million
compared with $50 million in 2002. Interest paid in 2003
was higher due to the increase in our outstanding debt levels
during the year. However, this increase was offset by an
increase in capitalized interest associated with our projects
under development and by lower interest rates on our outstanding
debt for 2003 compared with 2002, taking into account our
interest rate swaps. Interest expense excluded capitalized
interest of $54 million in 2003 compared with
$27 million in 2002. We expect that our interest payments
will increase to approximately $90 million in 2004, with
approximately $21 million of that amount expected to be
expensed and $69 million expected to be capitalized as part
of our Goro and Voiseys Bay projects.

At December 31, 2003, approximately
61 per cent of our long-term debt reflected interest rates
that were subject to periodic adjustments based on market
interest rates. Our long-term debt and average effective
interest rates at December 31, 2003 are summarized in
note 11 to our 2003 consolidated financial statements.
Reference is also made to Cash Flows, Liquidity and
Capital Resources  2003 Compared with
2002  Financing Activities below.






| |                              
| | -----------------------------
| | Goro Project Suspension Costs

In 2003, we incurred expenses of $17 million
in connection with the on-going care and custody costs
associated with the construction site at our Goro project while
the comprehensive project review was being conducted during
2003. These expenses were partially offset by a gain of
$21 million which we recorded on forward currency contracts
which had been entered into to hedge certain of the
projects capital costs expected to be incurred in Euros
and other currencies. These contracts became ineffective since
they no longer matched the original timing of expenditures due
to delays in project expenditures during 2003. With the expected
completion of the second, or Phase Two, of the comprehensive
review of the Goro project in the summer of 2004, we

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currently expect to be in a position to report on
the results of the second phase in the summer of 2004, including
an updated capital cost estimate for the project and project
schedule and whether, and if the decision is favourable, the
terms and conditions under which, we would proceed with the
project, and the additional effect, if any, that the results of
this review could have on our results of operations, financial
condition, profitability and cash flows.







| |                  
| | -----------------
| | Other Income, Net

Other income increased to $104 million in
2003, compared with $40 million in 2002, due to gains of
$35 million realized from the sale or transfer of shares
and other interests contributed to or received in conjunction
with strategic and other collaborations relating to our primary
metals operations, the receipt of a milestone payment of
$24 million under the terms of sale reached in 1998 of a
non-core exploration property and net gains of $12 million
in connection with derivative positions in metals intended to
meet future customer requirements. In addition, currency hedging
gains of $11 million were realized on the closing out of
certain forward currency contracts as a consequence of the Goro
project suspension. These gains were partially offset by a loss
of $2 million on the May 1, 2003 redemption of our
5 3/4% Convertible Debentures due 2004 and lower
interest income as a result of interest received on a tax refund
being lower during 2003 compared with the interest on tax
refunds received during 2002.






| |                        
| | -----------------------
| | Income and Mining Taxes

Income and mining taxes for 2003 included a
benefit of $106 million resulting from a reduction in the
Canadian federal tax rate, partially offset by a
$20 million charge for an increase in the future tax rates
in the Province of Ontario. We also benefitted from favourable
tax rulings and other decisions on tax matters from Canadian and
other jurisdictions concerning the tax treatment of certain
prior period transactions in the amount of $56 million as
well as the favourable impact of net non-taxable gains and
higher earnings at PT Inco, which are taxed at a relatively
lower rate than earnings in other jurisdictions. Partially
offsetting these tax benefits was the accrual for additional tax
expense of $48 million due to the strengthening of the
Canadian dollar relative to the U.S. dollar.






| |                  
| | -----------------
| | Minority Interest

Minority interest increased to $50 million
in 2003 compared with $17 million in 2002. Our minority
interest represents primarily the respective minority
shareholders interests in the earnings of
PT Inco, Inco TNC Limited, Jinco Nonferrous Metals
Co., Ltd. and Goro Nickel S.A. This increase in 2003 relative to
2002 was due primarily to the higher earnings at PT Inco as
a result of higher average realized prices for and higher
deliveries of nickel-in-matte produced by PT Inco.






| |                               
| | ------------------------------
| | Nickel Unit Cash Cost of Sales

Since this measure captures our key costs of
production and the impact of prices for our by-products, nickel
unit cash cost of sales represents a key performance measurement
that management uses to manage our costs and operations. Nickel
unit cash cost of sales before by-product credits, representing
a calculation equal to the total of all cash costs incurred to
produce a unit of nickel before the deduction of contributions
from by-products sold divided by Inco-source nickel deliveries,
increased to $4,453 per tonne ($2.02 per pound) in
2003 from $3,483 per tonne ($1.58 per pound) in 2002.

Nickel unit cash cost of sales after by-product
credits increased to $4,740 per tonne ($2.15 per
pound) in 2003 from $3,197 per tonne ($1.45 per pound)
in 2002.

The increase in nickel unit cash cost of sales
both before and after by-product credits in 2003 was due to the
unfavourable effect of the strengthening of the Canadian dollar
relative to the U.S. dollar on our costs incurred in
Canadian dollars, higher energy costs at PT Inco and our
Ontario operations, higher employment and pension costs, higher
costs for purchasing and processing larger volumes of purchased
intermediates, the ramp-up problems experienced at our Ontario
operations after the three-month strike discussed above, and in
addition, in

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the case of nickel unit cash cost of sales after
by-product credits, lower contributions from by-products,
primarily resulting from lower deliveries of platinum-group
metals.


A reconciliation of our nickel unit cash cost of
sales before and after by-product credits to cost of sales under
Canadian GAAP is shown in the table Reconciliation of
Nickel Unit Cash Cost of Sales Before and After By-Product
Credits to Canadian GAAP Cost of Sales under
Non-GAAP Financial Measure below.

It is currently expected that at least some of
the principal factors which have caused increases in nickel unit
cash cost of sales before and after by-product credits for 2003
will continue to adversely affect such nickel unit cash costs of
sales into 2004. As a result of changes in certain assumptions
and actual experience of plan assets as well as certain
legislative and regulatory requirements referred to under
Cash Flows, Liquidity and Capital Resources below,
we currently expect that pension expense will increase slightly
from the 2003 level of $107 million to approximately
$112 million in 2004 and, depending upon the future
performance of our pension plan assets and other related
factors, including changes in certain exchange rates, in
particular the Canadian dollar, this expense is expected to
remain at least at that level until at least 2005.






| |                                
| | -------------------------------
| | Allowance for doubtful accounts

Our allowance for doubtful accounts represents
three per cent and six per cent of total accounts receivable at
December 31, 2003 and 2002, respectively. In 2003, the
allowance for doubtful accounts decreased slightly from
$17 million at December 31, 2002 to approximately
$15 million at December 31, 2003. The majority of this
allowance relates to changes in the commercial relationships
with one of our principal customers that had filed for
bankruptcy protection in late March 2002. As a result of this
customers bankruptcy, such allowance increased by
$13 million as at December 31, 2002. This amount
remained in the allowance as at December 31, 2003. We have
no current expectation of any significant increase in the
allowance for doubtful accounts based on our past history of
collection.






| |                                     
| | ------------------------------------
| | Energy Costs and Relative Advantages

Energy costs are a significant component of
production costs in the nickel industry since nickel production
is very energy-intensive, especially with respect to the costs
of processing lateritic ores such as those processed at our
PT Inco operations. We enjoy relatively low energy costs
because of substantial production from our Canadian sulphide
ores, which generally consume only about one-fifth of the energy
required to process lateritic ores. In addition, low-cost energy
is available from our hydroelectric facilities in Ontario and at
PT Incos lateritic mining operations in Indonesia,
and from purchased hydroelectric power at our Manitoba
operations.

In 2003, our hydroelectric facilities in Ontario
generated approximately 22 per cent of our Ontario
operations electricity requirements, and
PT Incos 165-megawatt hydroelectric
generating-facility at Larona together with its 93-megawatt
hydroelectric generating facility at Balambano generated
virtually all of PT Incos 2003 electrical
requirements. The Balambano facility has been able to generate
power consistently above its design capacity due to improved
water management practices and higher reservoir levels and other
related factors than were assumed in developing its original
design capacity. In 2003, energy costs at our Ontario and
Manitoba operations were approximately 14 per cent of total
cash production costs, compared with 36 per cent for
PT Inco. The availability of captive hydroelectric power
decreased cash energy costs at PT Inco by about 51 per cent
in 2003, 47 per cent in 2002 and 50 per cent in 2001
relative to the energy costs that would have been incurred by
PT Inco if its operations were dependent on fuel oil as the
sole source to meet its energy requirements.






| |                      
| | ---------------------
| | Intermediates Segment

Our intermediates segment comprises the mining
and processing operations of PT Inco in Indonesia where
nickel-in-matte, an intermediate product, is produced and sold
primarily into the Japanese market. Net sales by PT Inco of
nickel-in-matte were $509 million in 2003 compared with
$321 million in 2002. This increase in 2003 relative to
2002 was due to increased deliveries as a result of higher
production rates and higher realized prices. PT Incos
deliveries of nickel-in-matte totalled a record 70,500 tonnes in
2003 compared with 61,900 tonnes in 2002 and 60,500 tonnes in
2001. The increase in 2003 compared with 2002 was due to higher
production. PT Incos net realized price for
nickel-in-matte in 2003 averaged $7,117 per tonne
($3.23 per pound) compared

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with $5,114 per tonne ($2.32 per pound)
in 2002 and $4,836 per tonne ($2.19 per pound) in
2001. The selling price of PT Incos nickel-in-matte
is determined by a formula which is based upon the LME cash
price for nickel. All of PT Incos production is sold
in U.S. dollars under long-term contracts to us and
Sumitomo Metal Mining Co., Ltd.


Nickel-in-matte production at PT Inco
increased by 18 per cent to a record 70,200 tonnes in 2003
from 59,500 tonnes in 2002, reflecting the processing of
higher-grade ore in 2003 compared with 2002 and higher
production rates. In addition, 2002 production at PT Inco
was adversely affected by a furnace rebuild. Cost of sales
increased 30 per cent for 2003 compared with 2002 due to
the increased production volumes and higher costs due to
increased consumption of fuel oil as a result of the higher
production rates and higher prices paid for fuel oil to operate
its dryers, kilns and its other oil-fired facilities. Fuel oil
costs were up 48 per cent in 2003 from 2002. Fuel oil
represented about 22 per cent of PT Incos costs
of production of nickel-in-matte in 2003 compared with
20 per cent in 2002. In addition, PT Inco incurred
additional costs for equipment rentals, employment and
maintenance costs to achieve its higher production rates in 2003.






| |                             
| | ----------------------------
| | Development Projects Segment

Our development projects include the
Voiseys Bay nickel-copper-cobalt project currently under
development in the Province of Newfoundland and Labrador and the
Goro nickel-cobalt project in New Caledonia.






| |                        
| | -----------------------
| | 2002 Compared with 2001





| |                 
| | ----------------
| | Earnings Summary

Our results reflected a net loss of
$1,482 million, or $8.27 per share ($8.27 per
share on a diluted basis) in 2002, compared with net earnings of
$304 million, or $1.51 per share ($1.49 per share
on a diluted basis) in 2001. Results for 2002 included, before
consideration of income and mining taxes, non-cash asset
impairment charges of $2,415 million to reduce the carrying
value of our Voiseys Bay project and certain other assets,
a charge of $25 million relating to the temporary
suspension of certain development activities and other actions
concerning our Goro project, as discussed under Results of
Operations  2002 Compared with 2001  Goro
Project Suspension Costs below, interest income of
$14 million associated with a tax refund and unfavourable
non-cash currency translation adjustments of $5 million.
Our 2002 results also reflected higher average realized prices
for nickel, increased deliveries of Inco-source nickel and
platinum-group metals, higher other income and reduced interest
expense, partially offset by lower realized prices for
platinum-group metals and higher selling, general and
administrative expenses. Our 2001 results included a non-cash
deferred tax benefit of $173 million, and favourable
currency translation adjustments of $39 million before
taxes. The tax benefit was due to the revaluation of deferred
income and mining tax liabilities for reductions in future tax
rates by the Provinces of Ontario and Manitoba.






| |                  
| | -----------------
| | Nickel Production

Nickel production increased by one per cent to
209,728 tonnes in 2002 from 207,077 tonnes in 2001. This
increase was primarily due to the decision to operate our
Ontario operations in 2002 without any planned maintenance
shutdown. Nickel production in 2002 was, however, below the
planned target of 213,000 tonnes. Nickel production was affected
during the second half of 2002 by certain technical problems
experienced at our Manitoba operations in blending purchased
nickel feed from Australia with Manitoba-source ores, including
ores with relatively high magnesium oxide levels, and
maintenance and equipment problems at certain mines at our
Ontario operations. The maintenance and equipment problems
experienced were resolved during the first half of 2003.
Finished nickel inventories were 23,126 tonnes at
December 31, 2002 compared with 26,517 tonnes at the end of
2001.






| |                  
| | -----------------
| | Copper Production

Copper production decreased by four per cent to
111,787 tonnes in 2002 from the previous year. Copper production
in 2002 was below the planned target of 125,000 tonnes. The
decline was due to production and mechanical difficulties at our
Ontario operations.

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| |          
| | ---------
| | Net Sales

Net sales to customers increased by five per cent
in 2002 from the previous year due to higher realized prices for
and deliveries of nickel and higher deliveries of platinum-group
metals, partially offset by lower realized prices for
platinum-group metals.

Primary nickel sales increased by 11 per
cent in 2002 from the previous year due to a 10 per cent
increase in the average realized price and a one per cent
increase in deliveries. Total deliveries of nickel were higher
in 2002 due to higher demand for our products, primarily in the
stainless steel industry.

Our nickel deliveries in 2002 represented an
estimated 20 per cent share of the world market, compared
with 21 per cent in 2001.

The average realized price for our primary nickel
products, including intermediates, was $7,143 per tonne
($3.24 per pound) in 2002 compared with $6,468 per
tonne ($2.93 per pound) in 2001.

Copper sales decreased by six per cent in 2002
from the previous year due to a two per cent decline in our
average realized price and a three per cent decline in
deliveries. Sales of precious metals decreased by 19 per
cent in 2002 due to lower realized prices, partially offset by
higher deliveries from increased production.






| |                                 
| | --------------------------------
| | Costs and Expenses/ Other Income





| |                                               
| | ----------------------------------------------
| | Cost of Sales and Other Operating
    Expenses

Cost of sales and other operating expenses
decreased by $38 million, or three per cent, in 2002. This
decrease was primarily due to lower energy costs and lower
deliveries of purchased nickel to customers, partially offset by
higher employment, supplies and services expenses.






| |                           
| | --------------------------
| | Depreciation and Depletion

Depreciation and depletion expenses decreased by
three per cent in 2002 from the previous year primarily due to
lower depletion expense at PT Inco resulting from the
reduced production attributable to a planned rebuild of a
furnace and related facilities which was completed during the
first quarter of 2003.






| |                                    
| | -----------------------------------
| | Selling, General and Administrative

Selling, general and administrative expenses
increased by $25 million in 2002 from the previous year,
primarily due to increased staffing, support and other expenses
related to the advancement of our Goro and Voiseys Bay
projects, higher accruals for share appreciation rights expense
under our stock compensation plans, increased Ontario capital
taxes and higher legal fees relating primarily to certain
outstanding tax matters and litigation.






| |                                 
| | --------------------------------
| | Currency Translation Adjustments

Currency translation adjustments of
$5 million in 2002 primarily represented the translation of
Canadian dollar-denominated liabilities, principally accounts
payable, deferred income and mining taxes and post-retirement
benefits, into U.S. dollars. The change of $44 million
from 2001 was due to a strengthening of the Canadian dollar
relative to the U.S. dollar during 2002, whereas in 2001
there was a weakening of the Canadian dollar relative to the
U.S. dollar.






| |                 
| | ----------------
| | Interest Expense

Interest expense was $50 million in 2002
compared with $56 million in 2001 and excluded capitalized
interest of $27 million in 2002 and $13 million in
2001 on debt incurred to finance the development of the
Voiseys Bay and Goro projects. The decrease in interest
expense in 2002 was primarily due to lower interest rates on
floating rate debt in 2002 relative to 2001 and increased
capitalized interest on debt incurred to finance the development
of the Voiseys Bay and Goro projects.

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| |                         
| | ------------------------
| | Asset Impairment Charges

On June 11, 2002, we announced that we would
be undertaking a review of the net carrying value of our
Voiseys Bay project in view of the statement of principles
entered into with the Government of the Province of Newfoundland
and Labrador on that date and other arrangements with key
stakeholders that would enable the development of that project
to proceed. We had noted on a number of occasions in our public
filings and other documents that such events, if and when they
were to occur, might require a significant reduction in the
carrying value of the Voiseys Bay project and in the
related deferred income and mining tax liability and in
shareholders equity. This review, which was completed in
July 2002, included an analysis of the key assumptions which we
utilized in evaluating this net carrying value on a
quarter-to-quarter basis relating to a number of important
factors, including our best assessment of the expected cash
flows from the project, how the development of Voiseys
Bay, taking into account the agreements which have been reached,
fits within our overall long-term development plans and updated
mining and other cost assumptions. As a result of this review,
we recorded a non-cash charge of $1,552 million, net of
deferred income and mining taxes of $770 million, in the
second quarter of 2002.

In addition, we recorded a non-cash charge of
$61 million, net of income and mining taxes of
$15 million, in the second quarter of 2002 to reduce the
carrying values of certain plant, equipment and other assets to
their estimated net recoverable amounts based on an evaluation
of their recoverability. The principal component of this charge
related to capitalized exploration and development costs of the
Victor Deep exploration project at our Ontario operations that,
as a result of the development of the deposits covered by our
Voiseys Bay projects, would probably not be put into
production. The balance of this charge consisted primarily of
reductions to certain redundant plant, equipment and non-core
assets as well as an additional provision for losses relating to
certain receivables and other assets arising from our commercial
relationships with one of our principal customers that had filed
for bankruptcy protection in late March 2002. In the first
quarter of 2002 we recorded a non-cash asset impairment charge
of $13 million, net of income and mining taxes of
$4 million, for losses associated with certain receivables
and other assets as a result of this bankruptcy filing.






| |                              
| | -----------------------------
| | Goro Project Suspension Costs

In early September 2002, the Goro project
experienced temporary labour disruptions by personnel associated
with certain project construction subcontractors. As a result of
these disruptions, a decision was made to curtail certain
activities at the projects site to enable us, contractors,
subcontractors and other interested parties to develop
procedures to avoid future disruptions. Over the
September  November 2002 period, a number of
procedures were put in place as part of a phased resumption of
certain of the project activities that had been curtailed.
During this period, we also initiated an update of the status of
certain key aspects of the project, including the necessary
permitting, capital cost estimate, project schedule and
organization. Work on certain critical parts of the project,
including engineering, continued during this update process.

On December 5, 2002, we announced that we
would be undertaking a comprehensive review of the Goro project.
This action had been based upon information from the
projects principal firms providing project engineering,
procurement and construction management services that we had
received that, if confirmed, would indicate an increase in the
capital cost for the project in the range of 30 to 45 per
cent above the then current capital cost estimate of
$1,450 million. As a result of the temporary suspension of
certain development activities and other actions which had been
taken by year-end 2002 during this review process, we recorded a
pre-tax charge of $25 million in the fourth quarter of
2002. This charge comprised $62 million relating to the
cancellation or termination of certain outstanding contractual
obligations, to accrue for demobilization costs and to reduce
the carrying value of certain assets relating to the project,
partially offset by currency hedging gains of $37 million
on certain forward currency contracts. These contracts, which
had been entered into to reduce exposure to exchange rate
changes associated with certain planned project expenditures to
be incurred in certain currencies, were closed out in early
January 2003 since they no longer matched the timing of such
expenditures due to their expected deferral as a result of the
review being undertaken.

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| |                  
| | -----------------
| | Other Income, Net

Other income increased by $27 million in
2002, primarily due to increased interest income as a result of
higher levels of cash and cash equivalents in 2002, compared
with 2001, interest income of $14 million associated with a
tax refund and gains realized from the sales of securities.






| |                        
| | -----------------------
| | Income and mining taxes

In 2002, the effective income and mining tax rate
of relief was 30.4 per cent, compared with 36.4 per
cent in 2001. In 2001, income and mining taxes included a
deferred tax benefit of $173 million due to the revaluation
of deferred income and mining tax liabilities for reductions in
future tax rates by the Provinces of Ontario and Manitoba.
Excluding this benefit, the effective tax rate in 2002 was lower
than the effective rate of 38.4 per cent in 2001. The
decrease was primarily due to the impact of the asset impairment
charges, a portion of which was not deductible for tax purposes,
lower mining taxes and lower foreign tax rate differences,
partially offset by lower resource and depletion allowances.






| |                  
| | -----------------
| | Minority Interest

Minority interest of $17 million in 2002
represents principally the respective minority
shareholders interests in the earnings of
PT Inco, Inco TNC Limited, Jinco Nonferrous Metals
Co., Ltd. and Goro Nickel S.A. The increase in minority interest
in 2002 from the previous year was due primarily to the higher
earnings of PT Inco, partially offset by $6 million
relating to the Goro project suspension costs referred to above.






| |                               
| | ------------------------------
| | Nickel Unit Cash Cost of Sales

Nickel unit cash cost of sales before by-product
credits increased slightly to $3,483 per tonne
($1.58 per pound) in 2002 from $3,439 per tonne
($1.56 per pound) in 2001. This increase was due to higher
operating expenses, principally employment, services and
supplies expenses, partially offset by lower energy costs at
PT Inco due to lower consumption of and prices for fuel oil.

Nickel unit cash cost of sales after by-product
credits increased by seven per cent to $3,197 per tonne
($1.45 per pound) in 2002 from $2,976 per tonne
($1.35 per pound) in 2001, primarily due to lower realized
prices for palladium, copper and cobalt, and higher nickel unit
cash cost of sales before by-product credits, partially offset
by higher deliveries of precious metals.

A reconciliation of our nickel unit cash cost of
sales before and after by-product credits to cost of sales under
Canadian GAAP is shown in the table Reconciliation of
Nickel Unit Cash Cost of Sales Before and After By-Product
Credits to Canadian GAAP Cost of Sales under
Non-GAAP Financial Measure below.






| |                                
| | -------------------------------
| | Allowance for doubtful accounts

In 2002, the allowance for doubtful accounts
increased from $4 million at December 31, 2001 to
$17 million at December 31, 2002. The increase of
$13 million was as a result of one of our principal
customers filing for bankruptcy protection in late March 2002.
Excluding this change, our allowance was $4 million at
December 31, 2002 and 2001.






| |                                     
| | ------------------------------------
| | Energy Costs and Relative Advantages

In 2002, our hydroelectric facilities in Ontario
generated approximately 19 per cent of our Ontario
operations electricity requirements, and
PT Incos hydroelectric generating facility at Larona
and its newer hydroelectricity facility at Balambano generated
virtually all of PT Incos 2002 electricity requirements.
In 2002, energy costs at our Ontario and Manitoba operations
were approximately 12 per cent of total cash production
costs, compared with 31 per cent for PT Inco. The
availability of captive hydroelectric power decreased cash
energy costs at PT Inco by about 47 per cent in 2002 and
about 50 per cent in 2001 relative to the energy costs that
would have been incurred had PT Incos sole source of
energy been fuel oil.

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| |                      
| | ---------------------
| | Intermediates Segment

Net sales of nickel-in-matte by PT Inco were
$321 million in 2002 compared with $296 million in
2001. The increase in 2002 compared with 2001 was due to a
modest increase in deliveries and higher realized prices. Net
realized prices for nickel-in-matte in 2002 averaged
$5,114 per tonne ($2.32 per pound) compared with
$4,836 per tonne ($2.19 per pound) in 2001.

PT Incos nickel-in-matte production in 2002
declined to 59,500 tonnes compared with 62,600 tonnes in 2001,
reflecting the rebuild of one of PT Incos furnaces and
related facilities during 2002. Cost of sales increased
2 per cent in 2002 compared with 2001 due to the increased
deliveries and higher production costs. Increased costs in 2002
relative to 2001 were due to additional overburden stripping
costs and drilling associated with the additional mining
requirements to meet PT Incos planned production and an
increase in supplies and services costs.




Cash Flows, Liquidity and Capital
Resources





| |                        
| | -----------------------
| | 2003 Compared with 2002





| |                     
| | --------------------
| | Operating Activities

Net cash provided by operating activities in 2003
totalled $131 million, which represented a significant
decrease from the $599 million in net cash provided by
operating activities in 2002. During 2003, increased cash was
required for working capital due to higher accounts receivable,
higher inventories and lower income and mining taxes payable in
2003 compared with the prior year, with this increased cash
requirement being partially offset by higher accounts payable
and accrued liabilities. Accounts receivable increased primarily
due to significantly higher selling prices for our finished
nickel products and, to a lesser degree, due to higher
deliveries of our finished nickel products in the fourth quarter
of 2003 compared with the fourth quarter of 2002. Inventories
were higher at the end of 2003 compared with 2002 due to higher
volumes of both finished and in-process nickel on hand at the
end of the year, as well as higher costs. The higher costs were
due, in part, to the strengthening of the Canadian dollar
relative to the U.S. dollar in 2003, higher costs for the
post-retirement benefits we provide, higher energy costs as a
result of the increased utilization rates and costs for natural
gas and heavy oil and higher costs for purchased intermediates
during the fourth quarter of 2003 given that these intermediates
are priced based upon LME and other benchmark prices. Income and
mining taxes payable declined during 2003 as a result of higher
tax payments during the year, the majority of which payments
related to taxes paid of $96 million in respect of 2002.
Accounts payable and accrued liabilities were significantly
higher at the end of 2003 as a result of the increases related
to the accrual for stock appreciation rights, the accrual for
estimated remediation costs for certain former industrial sites
in the United States and the impact of the strengthening of the
Canadian dollar because a significant portion of our accounts
payable is denominated in Canadian dollars. As a result of the
timing of our normal tax payments, tax payments totalling
approximately $15 million in respect of 2003 are expected
to be made by the end of the first quarter of 2004 versus
$88 million in 2003.

We have had in effect for a number of years
defined benefit pension plans principally in Canada, the United
States and the United Kingdom. Each of the jurisdictions in
which these plans are located has legislation and regulations
which, among other statutory requirements, cover the minimum
contributions to be made to these plans to meet their potential
liabilities as calculated in accordance with such legislation
and regulations. Based upon the value of the assets in these
plans, as determined pursuant to applicable provincial
legislation and regulations in Canada and other factors to be
taken into account under such legislative or regulatory
requirements, we, in accordance with such applicable legislation
or regulations, increased our contributions, including voluntary
contributions, to such plans to a level of $142 million for
2003, up from $67 million in 2002, and our pension expense
increased to $107 million for 2003 from $67 million in
2002. We currently expect that our pension contributions will
increase to approximately $160 million in at least 2004 and
2005 and pension expense will increase to approximately
$112 million for at least 2004 and 2005. Since the
liabilities associated with these pension plans are affected by
changes in certain exchange rates, mostly the Canadian dollar,
changes in such exchange rates could also significantly affect
the level of these contributions and pension expense for future
years.

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| |                     
| | --------------------
| | Investing Activities

Net cash used for investing activities decreased
to $565 million in 2003 compared with $609 million in
2002. The decrease was primarily due to lower capital spending,
mainly in respect of our Goro project which was partially offset
by higher capital spending in respect of our Voiseys Bay
project, compared with 2002. Reference is made to Risks
and Uncertainties  Other Risks and
Uncertainties  Capital Requirements and Operating
Risks below for a discussion of the risks associated with
our capital requirements. The following table sets forth our
capital expenditures by principal operations for the years
indicated:

|                     |  |              |     |      |  |      |     |  |  |   |     | 
|-------------------- |  | ------------ | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                     |  | 2003         |     | 2002 |  | 2001
|                     |  |              |     |      |  |     
|                     |  |             
|                     |  | ($ millions)
|Ontario operations   |  | $            | 101 |      |  | $    | 90  |  |  | $ | 97  | 
|Manitoba operations  |  |              | 50  |      |  |      | 32  |  |  |   | 33  | 
|PT Inco              |  |              | 45  |      |  |      | 42  |  |  |   | 29  | 
|Goro project         |  |              | 249 |      |  |      | 353 |  |  |   | 84  | 
|Voiseys Bay project |  |              | 138 |      |  |      | 73  |  |  |   | 9   | 
|Other                |  |              | 8   |      |  |      | 10  |  |  |   | 11  | 
|                     |  |              |     |      |  |      |     |  |  |   |     | 
|Total                |  | $            | 591 |      |  | $    | 600 |  |  | $ | 263 | 
|                     |  |              |     |      |  |      |     |  |  |   |     | 

Total capital expenditures for 2004 are currently
projected to be $1,040 million, including $430 million
for the initial phase of our Voiseys Bay project,
$255 million covering sustaining capital, $135 million
covering development work at existing operations and
$220 million for our Goro project assuming that a
favourable decision to proceed is made in the summer of 2004.






| |                     
| | --------------------
| | Financing Activities

Net cash used for financing activities in 2003 of
$235 million was significantly lower than the cash provided
by financing activities in 2002 of $791 million, which was
primarily due to the call and repayment of $574 million of
debt securities and the optional redemption of $487 million
for our Preferred Shares Series E, including the redemption
premium, which was partially offset by the cash provided from
new borrowings as described below, as well as cash received from
the issuance of common shares upon exercise of employee stock
options.

The table below summarizes our long-term
borrowings and repayments/redemptions of our long-term debt in
2003, 2002 and 2001. In addition to these changes, in 2003 we
issued $476 million in convertible debt for net

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proceeds of $470 million, of which
$114 million was initially recorded as debt and the
remainder of $356 million was recorded as equity under
Canadian GAAP.


|                             |                                        |              |  |      |   |      |  |     |   |  |  |      |  
|---------------------------- | -------------------------------------- | ------------ |  | ---- | - | ---- |  | --- | - |  |  | ---- | -
|                             |                                        | 2003         |  | 2002 |   | 2001
|                             |                                        |              |  |      |   |     
|                             |                                        |             
|                             |                                        | ($ millions)
|Long-term borrowings         |                                        |              |  |      |   |      |  |     |   |  |  |     
|                             | 5.70% Debentures due 2015              |              |  | 300  |   |      |  |    |   |  |  |     |  
|                             | 7.75% Notes due 2012                   |              |  |     |   |      |  | 400 |   |  |  |     |  
|                             | 7.20% Debentures due 2032              |              |  |      |   |      |  | 400 |   |  |  |     |  
|                             | PT Inco loan facilities                |              |  |     |   |      |  | 42  |   |  |  |     |  
|                             | Other                                  |              |  | 14   |   |      |  | 42  |   |  |  | 2    |  
|                             |                                        |              |  |      |   |      |  |     |   |  |  |     
|                             | Total                                  |              |  | 314  |   |      |  | 884 |   |  |  | 2    |  
|                             |                                        |              |  |      |   |      |  |     |   |  |  |     
|Repayments of long-term debt |                                        |              |  |      |   |      |  |     |   |  |  |     
|                             | 5 3/4% Convertible Debentures due 2004 |              |  | (173 | ) |      |  |    |   |  |  |     |  
|                             | 7 3/4% Convertible Debentures due 2016 |              |  | (145 | ) |      |  |    |   |  |  |     |  
|                             | 9.60% Debentures due 2022              |              |  | (159 | ) |      |  |    |   |  |  |     |  
|                             | PT Inco loan facilities                |              |  | (82  | ) |      |  | (66 | ) |  |  | (65  | )
|                             | 9.875% Debentures                      |              |  |     |   |      |  |    |   |  |  | (91  | )
|                             | Other                                  |              |  | (15  | ) |      |  | (15 | ) |  |  | (36  | )
|                             |                                        |              |  |      |   |      |  |     |   |  |  |     
|                             | Total                                  |              |  | (574 | ) |      |  | (81 | ) |  |  | (192 | )
|                             |                                        |              |  |      |   |      |  |     |   |  |  |     

In September 2003, we completed an underwritten
public offering in the United States of $300 million
aggregate principal amount of 5.70% Debentures due 2015.
The net proceeds from this offering were approximately
$297 million after underwriting commissions and other
expenses and were used, together with available cash, to redeem
our 7 3/4% Convertible Debentures due 2016 and our
9.60% Debentures due 2022 as discussed below.

In March 2003 we issued and sold in concurrent
private offerings (i) $273 million amount payable at
maturity of Convertible Debentures due March 14, 2023,
representing $249 million in gross proceeds to us, and
(ii) $227 million aggregate principal amount of
3 1/2% Subordinated Convertible Debentures due
March 14, 2052. The total combined gross proceeds from
these two issues of convertible debt securities were
$476 million. Together with available cash, the net cash
proceeds of $470 million received from the concurrent
private offerings, after commissions and other expenses, were
used to redeem, as discussed below, (i) our Preferred
Shares Series E and (ii) our
5 3/4% Convertible Debentures due 2004. For Canadian
reporting purposes, these two new convertible debt securities
were recorded as $114 million of debt and $356 million
of equity.

On March 28, 2003, we announced that we
would exercise our optional right to redeem all of our issued
and outstanding Preferred Shares Series E having a
$472 million aggregate liquidation preference and which
were subject to mandatory redemption in 2006, with this
redemption to be effective May 1, 2003. We also announced
the redemption of all of our outstanding $173 million
aggregate principal amount of 5 3/4% Convertible
Debentures due 2004. These redemptions were completed on
May 1, 2003. The total aggregate redemption price for our
Preferred Shares Series E was $487 million, including
a total redemption premium of $15 million based upon the
$50 issue price per Preferred Share Series E. The total
aggregate redemption price for our 5 3/4% Convertible
Debentures due 2004 was $178 million, including
$3 million in accrued interest and a loss on redemption of
$2 million.

On September 26, 2003, we announced that we
would exercise our optional right to redeem on October 27,
2003 all of our currently outstanding
7 3/4% Convertible Debentures due 2016 at a redemption
price of 100% of the aggregate outstanding principal amount plus
accrued interest to the October 27, 2003 redemption date.
Interest ceased to accrue on the 7 3/4% Convertible
Debentures due 2016 on and after that redemption date. The
conversion price for each 7 3/4% Convertible Debenture
due 2016 was $38.25 per Common Share.

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On September 26, 2003, we announced that we
would also exercise our optional right to redeem on
October 27, 2003 all of our currently outstanding
9.60% Debentures due 2022 at a redemption price of
104.32 per cent of the aggregate outstanding principal
amount (or $1,043.20 per $1,000 in principal amount) plus
accrued interest to the October 27, 2003 redemption date.
Interest ceased to accrue on the 9.60% Debentures due 2022
on and after that redemption date.

Preferred dividends totalling $6 million
were paid in 2003 compared with $26 million in 2002 on the
Preferred Shares Series E in accordance with the terms of
those shares. Dividends paid to minority interest shareholders
were $7 million and $1 million in 2003 and 2002,
respectively. This increase in 2003 relates to the increased
dividends paid by PT Inco.

To provide liquidity for our operations, we have
committed credit facilities which aggregated $680 million
as of year-end 2003. All of these credit facilities were undrawn
as of year-end 2003. These facilities are provided by a group of
lenders under separate agreements where the terms of each
agreement are substantially the same. Except for four facilities
totalling $145 million in commitments, the facilities
include revolving commitments from 364 days to four years.
The four facilities totalling $145 million in commitments
have only revolving periods, which expire either in June 2005,
June 2006 or June 2007. The respective revolving period of all
of the facilities may be extended for an additional 364-day
period at the discretion of the respective bank under the
particular facility, subject to the approval of lenders
representing, in the aggregate, at least 66 2/3 per
cent of the total aggregate commitments under the facilities,
and any amounts outstanding at the maturity of the revolving
period are repayable at that time. The revolving periods for the
facilities currently expire on dates ranging from June 1,
2004 to June 4, 2007, with $273 million of these
facilities expiring on June 1, 2004. While we do not
currently expect that we will not be able to renew these
facilities when they expire we cannot predict what, if any,
changes in the interest rates or other terms and conditions of
such facilities might be required to obtain their renewal. The
borrowings under these facilities may be made in Canadian
dollars in the form of prime rate loans or bankers
acceptances or in U.S. dollars in the form of
U.S. base rate loans or London Interbank Offered Rate
(LIBOR) loans. Borrowing under these facilities bear interest,
when drawn, at a rate which varies based on the type of
borrowing and our credit ratings at the time of borrowing. If a
significant portion of these facilities could not be renewed on
acceptable terms to us, this development could have a
significant adverse effect on our ability to meet our financing
requirements for our existing operations and development
projects, liquidity, results of operations and financial
condition.

Each credit facility provides that, so long as
advances are outstanding, we will be required to maintain a
Tangible Net Worth, as defined, of not less than
$1.5 billion and a ratio of Consolidated Indebtedness, as
defined, to Tangible Net Worth, as defined, not to exceed 50:50.
At December 31, 2003, such Tangible Net Worth was
$3.8 billion and the ratio of Consolidated Indebtedness to
Tangible Net Worth was 26:74. There can be no assurance that
future material adverse developments would not result in a
breach of these covenants. If we were unable to comply with
these covenants, the lenders would have the right to declare a
default and require all then outstanding loans to be repaid and
pursue the various remedies available to them under the credit
facilities, including declining to make any new loans under such
facilities. Any such action by the lenders could materially
adversely affect our ability to meet our financing requirements
for our existing operations and development projects, and our
results of operations, financial condition and liquidity. None
of these facilities have any covenant which would require any
acceleration or prepayment of outstanding balances if our credit
ratings on outstanding debt securities were downgraded or there
were a significant decline in our earnings, cash flows or in the
price of our publicly traded common shares or other equity
securities but a downgrade in rating would increase the interest
rate payable on borrowings under the facilities and, conversely,
an upgrade in the rating would decrease the interest rate
payable on borrowings. The credit rating agencies rate our
outstanding debt securities, which were rated as
investment-grade as of March 12, 2004, according to
criteria they utilize for such purposes. These criteria include,
among others, our profitability, balance sheet and interest
coverage ratios, and future business plans and prospects.
Accordingly, our credit ratings are dependent upon a number of
factors, including the views of the credit rating agencies on
the nickel industrys supply-demand balance and the
long-term price of nickel and our ability to continue to be one
of the low-cost producers of primary nickel and generate cash
flows from operations. Any significant downgrade in our current
credit ratings could have a material adverse

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effect on our access to the capital markets, the
terms under which we can borrow funds on a short-term and
long-term basis and accordingly, on our liquidity.


Our total debt as a percentage of our total debt
plus shareholders equity as of December 31 for the
years indicated is set forth in the following table:

|                                                            |  |             |    |      |  |      |    |   |  |  |    |  
|----------------------------------------------------------- |  | ----------- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                                            |  |            
|                                                            |  | December 31
|                                                            |  |            
|                                                            |  | 2003        |    | 2002 |  | 2001
|                                                            |  |             |    |      |  |     
|Total debt as % of total debt plus
    shareholders equity |  |             | 28 | %    |  |      | 30 | % |  |  | 14 | %
|                                                            |  |             |    |      |  |      |    |   |  |  |    |  

We currently believe that our level of cash and
cash equivalents as of December 31, 2003, together with
currently projected cash to be provided by our operations,
available cash from our unused lines of credit and access to
international capital markets, will be more than sufficient to
meet our currently anticipated cash requirements at least for
2004 and 2005. These requirements include ongoing cash needs for
our operations as well as the cash required to finance currently
planned expenditures on sustaining and other capital projects,
including our Voiseys Bay and Goro projects. As discussed
above, our required capital expenditures are very significant
over the 2004-2006 period given the current spending plans for
the initial phase of the Voiseys Bay project and assuming
that we reach the decision in the summer of 2004 to move forward
with the Goro project.

Our liquidity is affected by a number of key
factors, including decreases in the amount of, and a change in
the timing of, our production outlook at our existing operations
as well as the timing of completion of our Goro and
Voiseys Bay projects. Reference is made to Risks and
Uncertainties  Other Risks and
Uncertainties  PT Inco, Risks and
Uncertainties  Other Risks and
Uncertainties  Risks Associated with, and Importance
of, Future Low-Cost Nickel Projects and Risks and
Uncertainties  Other Risks and
Uncertainties  Uncertainty of Production and Capital
and Other Cost Estimates below for detailed discussions of
these factors and their impact on our liquidity.






| |                                                       
| | ------------------------------------------------------
| | Contractual Obligations and Commercial
    Commitments

The following table summarizes as at
December 31, 2003 certain of our contractual obligations
and other identified commercial commitments for the periods
specified:

|                                                            |  |              |       |           |  |           |     |           |  |         |     |  |  |   |    |  |  |   |       | 
|----------------------------------------------------------- |  | ------------ | ----- | --------- |  | --------- | --- | --------- |  | ------- | --- |  |  | - | -- |  |  | - | ----- | 
|                                                            |  |              |       | Less than |  |           |     |           |  | After  
|                                                            |  | Total        |       | 1 year    |  | 1-3 years |     | 4-5 years |  | 5 years
|                                                            |  |              |       |           |  |           |     |           |  |        
|                                                            |  |             
|                                                            |  | ($ millions)
|Long-term debt obligations                                  |  | $            | 1,512 |           |  | $         | 103 |           |  | $       | 177 |  |  | $ | 8  |  |  | $ | 1,224 | 
|Operating lease obligations                                 |  |              | 88    |           |  |           | 30  |           |  |         | 40  |  |  |   | 14 |  |  |   | 4     | 
|Purchase obligations(1)                                     |  |              | 396   |           |  |           | 324 |           |  |         | 70  |  |  |   | 2  |  |  |   |      | 
|Post-retirement benefit obligations                         |  |              | 160   |           |  |           | 160 |           |  |         |    |  |  |   |   |  |  |   |      | 
|Asset retirement obligations                                |  |              | 904   |           |  |           | 6   |           |  |         | 4   |  |  |   | 3  |  |  |   | 891   | 
|Other long-term liabilities and contractual
    obligations |  |              | 109   |           |  |           | 2   |           |  |         | 4   |  |  |   | 6  |  |  |   | 97    | 
|                                                            |  |              |       |           |  |           |     |           |  |         |     |  |  |   |    |  |  |   |       | 
|Total                                                       |  | $            | 3,169 |           |  | $         | 625 |           |  | $       | 295 |  |  | $ | 33 |  |  | $ | 2,216 | 
|                                                            |  |              |       |           |  |           |     |           |  |         |     |  |  |   |    |  |  |   |       | 



---



|    |                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These purchase obligations are largely related to
    our Goro and Voiseys Bay projects with the balance
    comprising routine orders to purchase goods and services at our
    current operating locations.

Amounts included in Post-retirement benefit
obligations in the table above represent the various
contractual funding requirements for our pension plans in 2004
and include a planned voluntary contribution to be made in
excess of statutory or regulatory requirements. The obligatory
funding requirements for our pension plans are actuarially
determined and are subject to future uncertainties, including
the expected rate of return on plan assets and the discount rate
on pension obligations, each of which may change over time.

The amounts included in Asset retirement
obligations represent our present legal obligations for
closure and related costs at all our existing operating mines
and non-operating mines and properties based upon the closure
plans applicable to those mines and properties. The contractual
obligations and commercial commitments

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set forth in the table above include our
commitments for the Goro and Voiseys Bay projects, as
noted under Outlook below, as of December 31,
2003. Except for these commitments, this table does not include
our expected capital expenditures over the next five years and
thereafter since such expenditures do not represent contractual
obligations or commercial commitments. We currently estimate
that our existing operations require, on an annual basis, in the
range of approximately $255 million of capital expenditures
to sustain their operations and to meet current environmental
regulations and similar requirements at our currently planned
production and/or utilization levels for these operations. The
capital expenditures for the initial phase of our Voiseys
Bay project and our Goro project will be dependent on a number
of factors, including, in the case of the Goro project, the
results of the second phase of the comprehensive review process
for the Goro project referred to under Results of
Operations  2003 Compared with 2002  Goro
Project Suspension Costs above, the availability of
certain financing from the French government and the
acquisition, as discussed under Outlook  Goro
Project below, of an interest in the Goro project by one
or more parties.


As of December 31, 2003, we had outstanding
letters of credit in the amount of $21 million to secure a
portion of our closure costs related to the closure of three
mines in Ontario. These letters of credit have a term of one
year and will automatically renew without any action by either
us or the party who issued the letters of credit until the
earlier of (i) us having complied with the terms of the
closure plans covering these mines, as filed with the Ontario
government, or (ii) funds from such letters of credit being
utilized by the Ontario Ministry of Northern Development and
Mines, the ministry responsible for overseeing such closure
plans, to perform any rehabilitation work if Inco does not meet
its requirements with respect to such closure plans. We have
also provided, in accordance with applicable regulatory
requirements, letters of credit or similar forms of financial
assurance to secure future closure costs associated with our
Voiseys Bay project and certain other operations or
projects in North America and elsewhere which currently have, or
are expected to have, fairly extended useful lives.

During 2003, we had discussions with
representatives of the Province of Manitoba regarding what
amount of financial assurance might be required for our Manitoba
operations in the future under recently enacted regulations. It
is currently expected that discussions with representatives of
the Province of Manitoba in 2004 will result in an agreed level
of and timeline for when financial assurance for these
operations would be required. We currently cannot predict what
amount of financial assurance will be required but we do not
believe that it will have a material effect on our results of
operations, financial condition or liquidity.

In connection with our 1996 acquisition of
Diamond Fields Resources Inc., we assumed an obligation to pay
to a company retained by Diamond Field Resources Inc. to provide
certain exploration and other services an annual royalty
amounting to three per cent of the net proceeds received from
the sale of ores, metals and other minerals produced from our
Voiseys Bay project, after deducting certain costs
associated with the production and sale of the ores, metals and
minerals produced. We have not incurred any such royalty
payments to date since the Voiseys Bay project is not yet
in production.

We are also committed to pay a quarterly
production royalty to the Indonesian government in respect of
our nickel ore production in Indonesia. The royalty is
determined based on the nickel or cobalt, as applicable, content
of the ore and ranges from $0.015 to $0.03 per kilogram
contained in the ore, based on certain assumptions with respect
to the market price of nickel. During the years ended
December 31, 2003, 2002 and 2001, we paid royalties to the
Indonesian government amounting to $5 million,
$3 million and $4 million, respectively.

We are required to make certain periodic payments
in connection with the use of our mining properties and
processing facilities, including payments for our mining
licences, leases, occupation and surface rights. During the
years ended December 31, 2003, 2002 and 2001, we paid
$4 million, $4 million and $3 million,
respectively, in such payments.

With respect to any mandatory redemption
requirements over the 2004  2008 period, reference is
made to (i) the discussion below under Cash Flows,
Liquidity and Capital Resources  2002 Compared to
2001  Financing Activities relating to the
special contingent conversion right that holders of certain of
our convertible debt have and (ii) note 11 to our 2003
consolidated financial statements for information on the
redemption provisions of certain long-term debt.

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There are no significant long-term contractual
arrangements with any related parties that create or result in
any obligations that are not on an arms length, negotiated
basis.






| |                        
| | -----------------------
| | 2002 Compared with 2001





| |                     
| | --------------------
| | Operating Activities

Net cash provided by operating activities was
$599 million in 2002, up from $360 million in 2001.
This increase was due primarily to higher earnings, excluding
asset impairment and other non-cash charges, and higher accounts
payable and accrued liabilities and income and mining taxes
payable. Net tax refunds totalled $9 million in 2002,
compared with net tax payments of $190 million in 2001.






| |                     
| | --------------------
| | Investing Activities

Net cash used for investing activities increased
to $609 million in 2002, compared with $261 million in
2001. The increase was primarily due to higher planned capital
expenditures, mainly in respect of our Voiseys Bay and
Goro projects.






| |                     
| | --------------------
| | Financing Activities

Net cash provided by financing activities in 2002
increased to $791 million from $14 million in 2001
principally as a result of the two debt offerings discussed
below.

On May 13, 2002, we issued and sold through
an underwritten public offering in the United States
$400 million aggregate principal amount of 7.75% Notes
due 2012. The net cash proceeds of $396 million received
from this sale, after commissions and other expenses, were used
to finance certain capital expenditures relating to existing
operations and for general corporate purposes, including capital
expenditures for development projects.

On September 23, 2002, we issued and sold
through an underwritten public offering in the United States
$400 million aggregate principal amount of
7.20% Debentures due 2032. The net cash proceeds of
$395 million received from this sale, after commissions and
other expenses, were used to fund capital requirements to
sustain existing operations and for general corporate purposes,
which we indicated at the time could include the purchase or
redemption of outstanding securities (other than common shares)
and funding capital expenditures for development projects.

Holders of our Zero-Coupon Convertible Notes
(LYON Notes) due March 29, 2021 had a special
conversion right, exercisable on April 1, 2002, giving them
the right to convert the then accreted value of their LYON Notes
(totalling approximately $238 million) into common shares
at the then market price of such shares. On April 1, 2002,
none of the holders of the LYON Notes elected to exercise their
right to convert the LYON Notes into common shares. Subsequent
special conversion rights may be exercised on March 29 in
each of 2007, 2011 and 2016. If holders were to exercise these
rights, we have the right to satisfy this special conversion
feature by delivering cash in lieu of common shares and it is
our current intention to satisfy any future conversions and the
related accreted value of the LYON Notes in cash.

Preferred dividends totalling $26 million
were paid in each of the years 2002 and 2001 on the Preferred
Shares Series E in accordance with the terms of those
shares. Dividends paid to minority interest shareholders were
$1 million in each of 2002 and 2001.

At December 31, 2002, cash and cash
equivalents totalled $1,087 million, up significantly from
$306 million at December 31, 2001, reflecting
increased net cash provided by operating activities and a
significant portion of the aggregate net proceeds of
$791 million received from the sales of debt securities in
the second and third quarters of 2002. Total debt at
December 31, 2002 was $1,643 million, up
$803 million from $840 million at the end of 2001,
reflecting the two debt offerings in 2002.

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Risks and Uncertainties

The following risks and uncertainties, among
others, should be considered in evaluating our outlook and
future prospects.






| |            
| | -----------
| | Market Risk

We define market risk as being the risk of
potential economic loss arising from adverse changes in market
rates and prices. Given the nature of our business and
operations, the areas of highest market risk or exposure for us
are nickel prices and, to a lesser extent, our prices of other
metals and commodities that we produce or purchase (representing
what we refer to as our metals and commodities risk), foreign
currency exchange rates (representing what we refer to as our
foreign exchange risk) and interest rates (representing what we
refer to as our interest rate risk), all of which are discussed
below. In the case of our metals and commodities risk, we sell
our products at prices based on world market prices and purchase
fuel oil and other supplies at market prices since these
supplies are essentially commodities which can be purchased from
a large number of available sources. In addition to the two
Australian sources of intermediate products referred to under
Overview above, we have a limited number of sole
source suppliers of critical materials or services, including
electricity in Canada and other locations. While the prices for
our primary nickel and other metals produced are based largely
on, and sold in, U.S. dollars, we are subject to foreign
exchange risk because we incur a substantial portion of our
costs and expenses in currencies other than the
U.S. dollar, in particular the Canadian dollar. We are
exposed to additional foreign exchange risk and are also exposed
to interest rate risk because, to the extent that we fund our
operations and capital expenditures primarily through long-term
and short-term borrowings, these borrowings are primarily in
U.S. dollars. Based upon past movements of certain foreign
currency exchange rates, as described below, and our current
expectations of continued volatility in such exchange rates for
2004, we believe that the potential near-term impact on future
earnings and cash flows with respect to a change in foreign
currency exchange rates could have a material impact on our
financial condition and results of operations. Based upon recent
past movements in interest rates, as described below, and our
current expectations of changes in interest rates in 2004, we
currently believe that the potential near-term impact of such
changes on future earnings will not have a material impact on
our financial condition or results of operations. The metals and
commodity risks relating to nickel and, to a lesser extent,
other metals produced by us, given the significance of price
realizations to us of such metals, are expected to continue to
have a material impact on our results of operations, cash flows
and financial condition.

We have engaged in transactions to reduce to a
significant degree the impact of certain of these market risks
to which we are exposed on our earnings and cash flows. We have
established policies and procedures governing the use of
derivative instruments to address certain market risks. These
policies and procedures are intended to reduce some of the
uncertainties associated with the market risks specific to our
business and operations and reduce the effect of market
fluctuations relating to the metals we produce and supplies of
products and services we need for our operations on our earnings
and cash flows. We only use derivative instruments based on an
economic analysis of the underlying exposures, anticipating that
adverse effects on future earnings and cash flows due to
fluctuations in metals and commodities prices, foreign currency
exchange rates and interest rates will be offset by proceeds
from, and changes in the fair value of, the derivative
instruments. We do not, however, hedge our exposure to all
market risks and do not hedge our exposure to any market risk in
a manner that completely eliminates the effects of changing
market conditions on earnings or cash flows.

We have had in place an internal risk management
committee for a number of years. This committee is comprised of
senior financial and marketing executives and chaired by our
Chief Executive Officer. This internal committee oversees our
hedging activities, whereby we use derivative instruments to
reduce market risks. The risk management committees
oversight includes reviewing compliance with our risk management
policies authorized by our Board of Directors. The risk
management policies set forth the responsibilities of the
internal risk management committee, its membership and conduct,
reporting requirements, controls, maximum hedging limits and
related authorizations delegated by our Board of Directors.

Under our risk management policies, hedging
activities are restricted by maximum limits which are
specifically approved by our Board of Directors. The maximum
limits are usually tied to a maximum percentage

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of forecast annual production volume (or annual
requirements, in the case of supplies or currencies, as the case
may be) for current and future years, up to five years. Maximum
limits are as follows: for nickel (year 1: 35 per cent
of forecast annual production, year 2: 25 per cent,
year 3: 10 per cent); copper, platinum, palladium and
gold (years 1 and 2: 75 per cent of forecast annual
production, years 3 to 5: 50 per cent); supplies (such
as oil, natural gas and electricity) (year 1: 75 per
cent of forecast annual requirements, year 2: 50 per
cent, years 3 to 5: 25 per cent); and foreign currency
(year 1: 75 per cent of forecast annual requirements,
years 2 and 3: 50 per cent, years 4 and 5:
20 per cent). To the extent that we hedge for certain
metals other than nickel and for supplies and foreign
currencies, we have historically hedged at levels below these
limitations absent specific circumstances where we believe that
hedging up to or close to such limits would be appropriate. In
the case of metals, other than nickel, produced by us, we have
from time to time entered into derivative instruments to fix
minimum realized prices and, in the case of nickel, as discussed
below, we have entered into formal sales or purchase contracts
to hedge certain sales to our customers or purchases by us from
suppliers of intermediate products.


In addition, interest rate swaps may, pursuant to
our annual financing plan approved each year by our Board of
Directors, be entered into annually to change maximum amounts of
indebtedness, in the case of 2003 up to $500 million,
subject to increases in this maximum relating to specific
financings, from fixed to floating rate debt or floating to
fixed rate debt at rates not to exceed those covering authorized
debt securities and maximum of hedges, in the case of 2003 up to
$500 million, may be entered into to fix rates on a
short-term basis in anticipation of a financing.

In addition to a quarterly review by our internal
risk management committee, for each quarter all hedging
activities and hedge positions are reviewed with and reported to
our Audit Committee. Our internal audit group is also
responsible for examining internal controls, trade execution and
monitoring, reporting and compliance with the risk management
policy annually.






| |                            
| | ---------------------------
| | Metals and Commodities Risk

We are subject to metals and commodities risk
because we sell our products and purchase fuel oil and other
supplies or services at prices for the most part effectively
determined through trading on major commodity exchanges, in
particular the LME and the New York Mercantile Exchange.
The prices offered on these exchanges generally reflect the
global balance of supply and demand for the particular metal or
commodity but are also influenced in the short-term by such
factors as investment funds flow, speculative activity in the
particular commodity and currency exchange rates.

The price of nickel, our principal product,
represents the major factor influencing our results of
operations, financial condition, profitability and cash flows.
The selling prices for our primary nickel products are generally
based on the LME cash nickel price. However, certain of our
products are customarily sold at a premium over the LME cash
price, particularly special products such as nickel powders and
foams. The markets for our products have been, and are expected
to continue to be, cyclical in nature and prices have been and
are expected to continue to be volatile. However, because we are
one of the largest producers and marketers of primary nickel in
the world, we have chosen, subject to certain limited exceptions
as discussed below, not to hedge or otherwise attempt to
mitigate to any significant degree the risk of fluctuations in
the price of nickel. We review this policy from time to time and
may choose to increase the currently limited use of derivative
instruments to reduce such risks in the future. In the case of
other metals produced by us, we have from time to time entered
into derivative instruments to fix minimum realized prices. We
do enter into LME forward purchase contracts which are
substantially offset by fixed price customer contracts in order
to more fully expose us to nickel price risk. We also enter into
LME forward sales contracts to minimize nickel price risk
associated with purchased nickel inventories of intermediates
and finished nickel products. In respect of these types of
hedges, at December 31, 2003 we had outstanding LME forward
contracts to purchase 9,048 tonnes of nickel during the 2004 to
2006 period at an average price of $12,250 per tonne
($5.56 per pound) and LME forward contracts to sell 4,104
tonnes of nickel during 2004 at an average price of
$15,858 per tonne ($7.19 per pound).

While we have, from time to time, utilized
derivative instruments to hedge the price of copper we realize,
we did not utilize any such instruments covering our copper
production in 2002 or 2003.

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Depending on market conditions, we enter into
precious metals hedging contracts with various financial
counterparties. These contracts, in the form of swap contracts
(whereby we simultaneously sell at a fixed price and buy the
same quantities for the same maturity dates at a floating
price), are intended to provide certain minimum price
realizations in respect of a portion of our future production of
such metals. At December 31, 2003, we had outstanding swap
contracts to exchange payments on 9,390 troy ounces of palladium
during 2005. Under the swap contracts, we receive a fixed price
of $295 per troy ounce and pay a floating price based on
monthly average spot prices. At December 31, 2003, we had
outstanding swap contracts to exchange payments on 82,428 troy
ounces of platinum in aggregate over the period from 2004 to
2006. Under these swap contracts, we receive fixed prices
ranging from $555 to $718 per troy ounce and pay a floating
price based on monthly average spot prices. At December 31,
2003, we had outstanding swap contracts to exchange payments on
60,604 troy ounces of gold in aggregate during 2004 and 2005.
Under these swap contracts, we receive fixed prices ranging from
$374 to $405 per troy ounce and pay a floating price based
on monthly average spot prices.

At December 31, 2003, we had outstanding put
option contracts, giving us the right but not the obligation, to
sell 60,317 troy ounces of platinum at an average price of
$643 per troy ounce at various dates over the 2004 to 2006
period, and sold call option contracts, giving the buyer the
right, but not the obligation, to purchase platinum at an
average price of $777 per troy ounce during the same time
period. At December 31, 2003, we also had outstanding put
option contracts, giving us the right, but not the obligation,
to sell 15,324 troy ounces of gold at an average price of
$345 per troy ounce at various dates during 2004, and sold
call option contracts, giving the buyer the right, but not the
obligation, to purchase gold at an average price of
$415 per troy ounce during the same time period.

We use fuel oil swap contracts to hedge the
effect of fuel oil price changes in respect of a portion of our
energy requirements in Indonesia. Under these contracts, we
receive or make payments based on the difference between a fixed
and a floating price for fuel oil. At December 31, 2003, we
had entered into swap contracts with financial institutions to
exchange payments on 120,000 tonnes of fuel oil in aggregate
during 2004 and 2005. Under the swap contracts, we pay fixed
prices averaging $134 per tonne for fuel oil and receive a
floating price based on monthly average spot price quotations.

Reference is made to note 20 to our 2003
consolidated financial statements for information concerning our
derivative instruments, including how the fair value of such
instruments has been determined.

Once our development projects begin commercial
production, we will become a significant producer of cobalt.
When that occurs, we could be affected by the highly competitive
market for cobalt that currently exists and is expected to
continue to exist. Cobalt sold to customers is currently sold
either on a fixed price basis using annual contracts for
customers in certain industries or on the basis of prices as
quoted in the Metals Bulletin and Platts, which are recognized
metals industry publications that publish cobalt and other metal
prices. Such published prices are generally accepted as
representing the benchmark or market price indicator for cobalt.
Cobalt, like nickel and copper, has historically been subject to
significant price volatility and we currently expect that such
volatility will continue. The financial analyses undertaken by
us in support of the substantial investment to be made with
respect our development projects has been based upon a long term
price of cobalt of $15.40 per kilogram ($7.00 per
pound). If realized cobalt prices, as well as realized prices
for the other metals to be produced by these projects, were to
be below the long-term prices assumed by us, the expected
financial returns from, and expected cash and other costs for,
these projects would be adversely affected.

At December 31, 2003, none of our currently
planned nickel or copper production is covered by or subject to
derivative contracts. At December 31, 2003, we had entered
into derivative contracts to hedge a portion of our planned
precious metals production over varying periods up to three
years. Outstanding derivative contracts for platinum cover
40 per cent, 32 per cent and 14 per cent of
planned platinum production in 2004, 2005 and 2006,
respectively; for palladium the derivative contracts cover
5 per cent of planned palladium production in 2005 and for
gold the derivative contracts cover 69 per cent and
47 per cent of planned gold production in 2004 and 2005,
respectively. Each derivative contract matures in 2004, 2005 or
2006, indicated above for the planned production to which it
relates. We currently expect to produce precious metals from our
estimated proven and probable ore reserves at our Ontario
operations for a period in excess of twenty years, a period that
extends well beyond the maturity of our current derivative
contracts covering precious metals.

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| | ---------------------
| | Foreign Exchange Risk

By virtue of our international operations, we
incur costs and expenses in a number of foreign currencies other
than the U.S. dollar. The exchange rates covering such
currencies have varied substantially in the last three years. A
substantial portion of our revenue is received in
U.S. dollars since the price of nickel and other metals we
produce are generally referenced in U.S. dollars, while a
significant portion of our costs and expenses are incurred in
Canadian dollars. Fluctuations in exchange rates between the
U.S. dollar and the Canadian dollar and between the
U.S. dollar and certain other currencies gives rise to
foreign currency exposure, either favourable or unfavourable,
which have materially affected and are expected to continue to
affect our results of operations and financial condition.

Our primary foreign exchange risk is to changes
in the value of the Canadian dollar relative to the
U.S. dollar. We reduce, from time to time, the impact of
this risk by entering into forward currency contracts and
foreign currency options. However, these activities do not
eliminate the potentially significant adverse effect that
exchange rate fluctuations could have on our results of
operations or financial condition. At the end of 2003, these
contracts took the form of forward contracts which establish a
fixed exchange rate for the Canadian dollar and forward currency
contracts that establish a fixed price for the future purchases
of the Euro and Australian dollar covering future capital and
other expenditures relating to the Goro project. The purpose of
the forward currency contracts is to hedge (i) a portion of
future Canadian dollar production costs and (ii) future
Canadian dollar capital expenditures relating to our
Voiseys Bay project. The purpose of the Euro and
Australian dollar forward currency contracts is to hedge a
portion of the future construction costs of the planned
production facilities for the Goro project in New Caledonia
assuming we decide to proceed with this project. As discussed
under Results of Operations  2003 Compared with
2002  Goro Project Suspension Costs above,
certain of these forward currency contracts relating to our Goro
project were closed out in 2003.

We are, to a substantially lesser extent, also
subject to fluctuations in the value of the Indonesian rupiah
relative to the U.S. dollar as a result of our operations
in Indonesia. This impact is reduced by the fact that a
significant portion of PT Incos costs and revenues are
effectively denominated in U.S. dollars. Because of the
limited nature of this exposure, we do not customarily hedge the
value of the rupiah against the U.S. dollar and no such
financial instruments were in effect at December 31, 2003.

At December 31, 2003, we had outstanding
forward currency contracts to purchase Aus.$66 million and
40 million Euros at average exchange rates of $0.525 and
$0.873, respectively, during 2004. The purpose of these
contracts, as discussed above, is to hedge a portion of the
future construction costs of the planned production facilities
for the Goro project in New Caledonia assuming a decision is
made to proceed with the project. In respect of our currency
contracts to hedge against the foreign exchange risks associated
with the Goro project, total gains in the amount of
$21 million were recorded in 2003 as income due to forward
currency contracts that became ineffective due to the deferral
of a portion of the originally planned expenditures for this
project.

At December 31, 2003, we had outstanding
forward currency contracts to purchase Cdn.$50 million at
an average exchange rate of $0.697 during 2004. The purpose of
these contracts is to hedge a portion of the future construction
costs of the planned facilities for the initial phase of the
Voiseys Bay project. At December 31, 2003, the
outstanding contracts represented approximately six per cent of
the total expected spending in Canadian dollars for the related
assets. For the period from January 2, 2004 through
March 12, 2004, we entered into additional forward currency
contracts for the Voiseys Bay project. Depending on market
conditions, we may enter into additional forward currency
contracts in respect of our Voiseys Bay project in the
future. At March 12, 2004, we had, in aggregate,
outstanding forward currency contracts to purchase
Cdn.$535 million at an average rate of $0.746, representing
68 per cent of the total expected capital expenditures in
Canadian dollars for the initial phase of the Voiseys Bay
project. We also had outstanding at December 31, 2003,
forward currency contracts to purchase Cdn.$35 million at
an average exchange rate of $0.745 during 2004; the purpose of
these contracts is to reduce the risk that the eventual
U.S. dollar cash flows relating to a portion of our future
Canadian production costs will be adversely affected by an
appreciation of the Canadian dollar.

We have experienced periods where the
U.S. dollar has been relatively strong in relation to the
Canadian dollar (for example, in 1999) and, more recently, when
the U.S. dollar has been relatively weak in relation to the
Canadian dollar (for example, in 2003). Historically, the
positive correlation between the Canadian dollar and

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metal prices has resulted in higher profit
margins for us during periods when the Canadian dollar has been
relatively strong against the U.S. dollar. Therefore, while
a stronger Canadian dollar has historically led to higher cash
operating costs in U.S. dollar terms, the historical
accompanying increase in metal prices has resulted in higher
profit margins. Conversely, historically when the Canadian
dollar has weakened relative to the U.S. dollar we have
experienced lower cash operating costs in U.S. dollar terms
and the historical accompanying decrease in metal prices has
resulted in lower profit margins for us. Due to this correlation
and the historical responsiveness of nickel prices to cyclical
supply-demand factors, we do not currently anticipate that the
impact of fluctuations in the Canadian dollar will affect the
quantities of our estimated proven and probable ore reserves
given how we determine the metal prices and exchange rates we
use in estimating these proven and probable ore reserves.
However, there can be no assurance that the historical
correlation between the change in the value of the Canadian
dollar relative to the U.S. dollar and metal prices will
continue and if it fails to do so our estimates of proven and
probable ore reserves could be adversely affected by a
significant strengthening of the Canadian dollar compared with
the U.S. dollar. To the extent that we would use other
expected metal prices and exchange rates for our estimated
proven and probable ore reserves, these estimates could change
significantly.


While we use the U.S. dollar as the
functional currency in our Canadian operations, we are required,
for income tax purposes, to report income subject to Canadian
tax in Canadian dollars. We have a number of long-term debt
obligations denominated in currencies other than Canadian
dollars. Fluctuations in the value of the relevant foreign
currencies in relation to the Canadian dollar can give rise to
capital gains or losses for Canadian income tax purposes on the
repayment of any such foreign currency-denominated long-term
debt obligations. Since the U.S. dollar is both our
functional and reporting currency, no gains or losses on the
settlement or marking to market of U.S. dollar-based
obligations (representing the primary dollar denomination of our
long term debt obligations) is reported in computing income
reported in our 2003 consolidated financial statements. For
reporting purposes, we reflect the Canadian taxes potentially
payable on the settlement of our non-Canadian dollar-denominated
debt in computing our long-term deferred tax assets and
liabilities for unrealized gains and losses and as a current tax
expense for realized gains and losses. No taxable event in
respect of the debt occurs until the debt is settled by payment
or other form of discharge for Canadian tax purposes.

Should a fluctuation in the value between the
Canadian dollar and the relevant foreign currencies result in us
being subject to reporting a capital gain for Canadian income
tax purposes when a debt were repaid, we would report as either
a current tax expense in respect of realized gains, or a
deferred tax expense in respect of unrealized gains, for the
Canadian income taxes payable in respect of such a gain. This
increase in our tax provision may distort our effective tax
rate, since no such foreign currency gain would be reported in
our consolidated financial statements.






| |                   
| | ------------------
| | Interest Rate Risk

Our exposure to changes in interest rates results
from investing and borrowing activities undertaken to manage our
liquidity and capital requirements. We generally have used
fixed-rate debt to finance long-term investments, while
variable-rate debt has been used to meet working capital
requirements and related requirements on a more near-term basis.
At December 31, 2003, taking into account our interest rate
swaps discussed below, approximately 61 per cent of our
total debt, or $917 million, was subject to variable
interest rates. Based upon the level of floating or
variable-rate debt at December 31, 2003, the impact of a
10 per cent change in interest rates, or 12 basis
points, would change interest expense by about $1 million
over a full year. As noted under Cash Flows, Liquidity and
Capital Resources  2003 Compared with 2002
above, we may be required to raise additional debt in the future
and, accordingly, our results of operations and cash flows could
be materially adversely affected by changes in interest rates in
the future despite any interest rate swaps we might then have in
effect.

As at December 31, 2003, we had an
outstanding interest rate swap of a notional principal amount of
$300 million on our 5.70% Debentures due 2015, whereby
we receive a fixed rate of interest of 5.70% and pay a floating
rate at 0.57% over 6-month LIBOR. We also had an interest rate
swap of a notional principal amount of $400 million on our
7.75% Notes due 2012, whereby we receive a fixed rate of
interest of 7.75% and pay a floating rate at 3.25% over 6-month
LIBOR.

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| |                  
| | -----------------
| | Counterparty Risk

Our interest rate swaps, metals hedging and
foreign currency risk management activities expose us to the
risk of default by the counterparties to such arrangements. Any
such default could have a material adverse effect on our results
of operations and financial condition. We do not obtain
collateral or other security to support derivative instruments
subject to credit risk but mitigate this risk by dealing only
with counterparties that we believe, based upon an assessment of
each such counterpartys financial history and experience,
to be financially sound and, accordingly, we do not anticipate a
loss for non-performance by any counterparty with whom we have a
commercial relationship.






| |                   
| | ------------------
| | Environmental Risk

Environmental legislation and regulations affect
nearly all aspects of our operations worldwide. Such legislation
and regulations apply to us along with other companies in the
mining and metals industry. These types of legislation and
regulations require us to obtain operating licences, permits and
other approvals and impose standards and controls on activities
relating to mining, exploration, development, production,
closure and the refining, distribution and marketing of nickel
and other metal products. Environmental assessments are required
before initiating most new projects or undertaking significant
changes to existing operations. In addition to current
requirements, we expect that additional environmental
regulations will likely be implemented to protect the
environment and quality of life, given issues of sustainable
development and other similar requirements which governmental
and supragovernmental organizations and other bodies have been
pursuing. Some of the issues currently under review by
environmental regulatory agencies include (i) further
reductions in, or requiring enhanced stabilization of, various
emissions, including sulphur dioxide, metal and greenhouse gas
emissions, (ii) additional mine reclamation and
restoration, and (iii) more restrictive water, air and soil
quality and waste treatment and disposal.

Effective January 1, 2003, we adopted a new
accounting standard of the Canadian Institute of Chartered
Accountants (CICA) relating to asset retirement obligations.
This standard significantly changed the method of accounting for
asset retirement obligations. This liability is accreted over
time through periodic charges to earnings. In addition, the
asset retirement cost is capitalized as part of the assets
carrying value and depreciated over the assets useful
life. The estimate of the total liability for asset retirement
obligations has been developed from independent environmental
studies, which include an evaluation of, among other factors,
information available at that time with respect to closure plans
and closure alternatives, the anticipated method and extent of
site restoration using current costs and existing technology,
and compliance required by presently enacted laws, regulations
and existing industry standards. The total liability for asset
retirement obligations represents estimated expenditures
associated with closure, progressive rehabilitation and
post-closure care and maintenance. Potential recoveries of funds
from the future sale of assets upon the ultimate closure of
operations have not been reflected in the estimate of the total
liability or related annual provision. Future changes, if any,
to the estimated total liability, as a result of changes in
requirements, laws, regulations and operating assumptions may be
significant and would be recognized prospectively as a change in
accounting estimate, when applicable. Although the ultimate
amount to be incurred is uncertain, the total liability for
asset retirement obligations in respect of our worldwide
operations to be incurred primarily after cessation of
operations was estimated to be $141 million at
December 31, 2003 based upon certain discount rates and
timing with respect to when these costs would be expected to be
incurred applied in accordance with the new accounting standard
previously discussed.

Changes made in 2000 to mining regulations in the
Province of Ontario require us to provide letters of credit or
other forms of financial security to fund our future reclamation
and restoration costs, which are not expected to be incurred for
many years, if we were to no longer meet certain minimum
investment grade credit ratings for our outstanding publicly
traded debt securities. Although our debt securities are
currently rated investment grade, they were rated below
investment grade in recent times and there can be no assurance
that this situation will not reoccur. If we are not able to
maintain the minimum investment grade credit ratings, it is
currently estimated that letters of credit or other forms of
financial security associated with the currently estimated costs
of the eventual future closure of our mines and other facilities
in Ontario would have to cover a significant portion of such
closure costs. Due to the closure of three mines in Ontario, in
2002 we were required under such mining regulations to provide
letters of credit in the amount of $21 million to secure
these near-term closure costs as

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discussed below. In addition, we are subject to
certain Indonesian regulations which require us to provide
security for the reclamation of land areas that have been mined.
In the case of our Manitoba operations, in 2003 we submitted
closure and reclamation plans for all our operations in that
province. We expect that, based upon regulations in the Province
of Manitoba, we will be required to provide some form of
financial security for our future reclamation and restoration
costs in that province. However, it is not currently expected
that these costs with respect to our Manitoba operations for
Manitobas recently submitted closure plan (beyond what has
been included in the $141 million consolidated liability
referred to above) and for our Indonesian operations and/or such
financial security to be provided for our Manitoba operations
will be of a material amount. These potential costs might not be
incurred until many years in the future. If these requirements
for letters of credit or other forms of financial security had
to be satisfied, they could have an adverse effect on the
amounts available for borrowing by us under our credit
facilities.


In February 2002, the Ontario government issued a
control order that requires us to reduce sulphur dioxide
emissions by 34 per cent at our Ontario smelting operations
by the end of 2006. We are currently moving forward with an
investment of approximately $90 million in fluid bed
roaster off-gas scrubbing technology intended to reduce sulphur
dioxide emissions to the new levels mandated by this new control
order by the end of 2006. As part of the control order, we will
also be required to (i) reduce ground level concentrations
of sulphur dioxide, (ii) continue research into the
technology and economics of further reductions in sulphur
dioxide emissions and (iii) report annually to the Ontario
Ministry of the Environment and the public on the progress of
this research program. The control order calls for a final
report on achieving the additional reductions to be submitted by
December 31, 2010. We do not currently expect that
compliance with the annual sulphur dioxide emission levels from
our smelter operations or ground level concentration levels as
set forth in the control order will have any significant effect
on our costs, operating procedures or annual production of
nickel and other primary metals from our Ontario operations. In
February 2003, the Province of Ontario issued a discussion paper
covering proposals for further reductions in sulphur dioxide
emissions by non-ferrous smelting operations, including our
operations. The federal government of Canada has also recently
designated for further regulation certain sulphur dioxide and
particulate emissions from copper-smelting operations such as
those we have in Ontario. To this end, the Canadian federal
government has proposed, on an informal basis, certain
initiatives which would be applicable to metals processing
operations in Canada, including us, that would have the effect
of requiring operators such as us to prepare and submit a plan
outlining measures to be taken to reduce these emissions to meet
specified levels. While we do not currently believe that these
initiatives will be put into effect, if they did come into
effect as proposed they would require us to commit to material
additional capital expenditures and/or significantly reduce our
production of nickel and certain other metals by as early as
2008. While we are not able to determine the effect, if any, of
these recent developments and significant future changes in
regulatory emission limits and other environmental laws and
regulations that may be enacted in the future due to the
uncertainty surrounding the timing and ultimate form that such
changes may take, any such changes could have a material adverse
effect on our business, results of operations, financial
condition and liquidity.

As of December 31, 2003, we had outstanding
letters of credit in the amount of $21 million to secure a
portion of our closure costs related to the closure of three
mines in Ontario. These letters of credit have a term of one
year and will automatically renew without any action by either
Inco or the counterparty until the earlier of (i) Inco
having complied with the terms of the certified closure plans or
(ii) funds from such letters of credit being utilized by
the Ontario Ministry of Northern Development and Mines, the
ministry responsible for overseeing such closure plans, to
perform rehabilitation work if we did not meet the requirements
with respect to such closure plans. We are required to submit
annual updates on changes to the closure plans, including any
decommissioning and rehabilitation work completed during the
previous year. We have also provided letters of credit or
similar forms of financial assurance to secure future closure
costs associated with our Voiseys Bay project and certain
other operations or projects in North America and elsewhere
which currently have, or are expected to have, fairly extended
useful lives.

Canada signed and ratified the Kyoto Protocol to
the United Nations Framework Convention on Climate Change
(Kyoto Protocol) in December 2002. The Kyoto
Protocol calls for significant reductions in the emissions of
greenhouse gases, such as carbon dioxide, and nationwide
ceilings on such emissions. In November 2002, the federal
government of Canada released an initiative to address certain
causes of climate changes. The

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specific requirement of this initiative is also
to limit the discharge of carbon dioxide and other greenhouse
gases. Neither the Kyoto Protocol nor this other initiative has
as yet established what the specific allocation of reductions
among various sources of greenhouse gases would be. In August
2003, the federal government of Canada released certain
principles covering the Kyoto Protocol intended to be used to
implement the objective of having the oil and gas, thermal
energy and mining and manufacturing sectors reduce greenhouse
gases by certain specified limits. While the precise impact on
our operations in Canada and the operations of others who
provide energy or other products or services to us is uncertain
at this time, we anticipate that compliance with these
initiatives could have a significant adverse effect on our
results of operations and costs.


In 2002, the Danish Environmental Protection
Agency, as part of the authority granted to it under certain
environmental regulations of the European Union Commission,
published draft risk assessment reports, including certain
conclusions concerning potential human health hazards associated
with nickel metal and certain soluble nickel compounds,
including nickel sulphate, nickel chloride and nickel nitrate.
This Agency determined, based on certain animal studies, that
soluble nickel is a reproductive toxin and has proposed certain
product labeling requirements as a result of this determination.
It has also assessed certain other environmental issues. In
addition, based upon these draft reports and taking into
consideration certain studies, this Agency has proposed that
soluble nickel be classified under its hazard classification
system as a known human carcinogen. During 2003, the European
Union Commission released draft sections of their risk
assessment focussing on the characterization of certain forms of
nickel and the related human health assessment. This risk
assessment is currently expected to be completed in 2004. The
study of the socio-economic effects of such risk assessment also
moved forward in 2003. Before any such proposed classification
could come into effect, a number of regulatory and
administrative steps would have to be completed. If this
proposed classification were to come into effect as currently
proposed, it could result in use restrictions and other
requirements which could have a material adverse impact on
certain producers and end users of the forms of nickel covered
by such classification and on our business, results of
operations, financial condition and liquidity. The European
Union Commission also in 2002 proposed a directive on air
pollution which includes target limit values for nickel since
nickel is considered by this Commission to be a possible
carcinogenic pollutant. Member states of the European Union will
have until 2010 to achieve the target limit values, after which
more stringent binding limit values may be considered. The
technical and socio-economic feasibility of meeting such limits
are currently being considered by the European Union Commission
and those industries that would be affected, including nickel
producers.

Further changes in environmental laws, the
restrictions on our discharge of greenhouse gases as a result of
Canadas program to comply with the Kyoto Protocol and
similar developments that may be imposed, new information on
existing environmental conditions and other events, including
legal proceedings brought based upon such conditions or an
inability to obtain necessary permits, could require increased
accounting reserves or compliance or other expenditures or
otherwise have a material adverse effect on our business,
results of operations, financial condition and liquidity.

Other changes in environmental legislation could
have a material adverse effect on product demand, product
quality and methods of production and distribution. The
complexity and breadth of these issues make it extremely
difficult to predict their future impact on us. We anticipate
capital expenditures and operating expenses will increase in the
future as a result of the implementation of existing and new and
increasingly stringent environmental regulations. Compliance
with environmental legislation can require significant
expenditures and failure to comply with environmental
legislation may result in the imposition of fines and penalties,
liability for clean up costs, damages and the loss of important
permits.

There can be no assurance that we will at all
times be in compliance with all environmental regulations or
that steps to bring us into compliance would not materially
adversely affect our business, results of operations, financial
condition or liquidity. We may also be subject to claims from
persons alleging that they have suffered significant damages as
a result of the environmental impact of our operations,
including facilities that have ceased to operate for many years.

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| |                              
| | -----------------------------
| | Other Risks and Uncertainties





| |        
| | -------
| | PT Inco

Our investment in PT Inco at book value as of
December 31, 2003 totalled $364 million. In addition,
a lender to PT Inco currently has the right, under certain
circumstances, to require one of our wholly-owned subsidiaries
to purchase approximately $30 million in debt extended to
PT Inco by that lender. For 2004, PT Incos production is
expected to represent about 32% of our total planned production.
In 1999, to meet PT Incos cash shortfalls attributable
principally to the increase in the capital cost of the new
hydroelectric facilities which were part of PT Incos
expansion project, the relatively low nickel prices, and
constraints on PT Incos production attributable to then
reduced hydroelectric power generation caused by below average
rainfall, we advanced $88 million to PT Inco. These
advances have since been repaid. To the extent that PT Inco
would experience cash shortfalls in the future, particularly if
there were to be a significant decline in primary nickel demand
and nickel prices, we may again conclude that it would be
necessary to advance cash to PT Inco in order to meet PT
Incos cash needs.

The uncertain political situation and security
concerns in Indonesia, primarily as a result of the ongoing
economic, political and social problems facing that country,
could adversely affect PT Incos ability to operate. While
there has been no indication that the Government of the Republic
of Indonesia is considering currency controls, nationalization
of certain properties or facilities or other similar actions,
regional and local governmental authorities have sought to take
greater control of the development of their resources and these
or other political developments, including, but not limited to,
the possibility of disruptions in PT Incos operations
arising out of the actions of non-governmental organizations or
community activist groups, could have a material adverse effect
on PT Incos, and our overall nickel production levels,
business, results of operations, financial condition and cash
flows.






| |                                                                              
| | -----------------------------------------------------------------------------
| | Risks Associated with, and Importance of,
    Future Low-Cost Nickel Projects

As part of our strategy to be the worlds
lowest cost and most profitable nickel producer, we have
continued our efforts to develop new low-cost sources of nickel.
Following the completion of the PT Inco expansion project in
late 1999, we have focused, as discussed above, on future
projects to commercialize our Goro nickel-cobalt project and our
Voiseys Bay nickel-copper-cobalt project. A number of
risks and uncertainties are associated with the development of
these projected low-cost sources of nickel and other metals,
including political, regulatory, design, construction, labour,
operating, technical and technological risks, uncertainties
relating to capital and other costs and financing risks and, in
the case of Goro, risks related to the possible future
transition to independence of New Caledonia.

In addition to the risks and uncertainties
referred to above, there are certain issues that must be
resolved to enable the commercial development of each of these
projects to proceed. For the Goro project, we still need to
receive the necessary environmental and operating permits,
complete the second phase, or Phase Two, of our comprehensive
review focusing on the project schedule, capital costs, scope,
execution plan and other key aspects of this project and develop
an acceptable updated capital cost estimate to enable us to
reach a decision as to whether or not to proceed with the
project (as discussed under Risks and
Uncertainties  Other Risks and
Uncertainties  Uncertainty of Production and Capital
and Other Cost Estimates below) and, as further discussed
below, arrange the required financing, including obtaining
certain financial support from the Government of France and
other direct or indirect financial assistance under other
government-sponsored programs and bringing in a partner for the
project, in each case on acceptable terms. In the case of our
Voiseys Bay project, certain preliminary work on site
during the second half of 2002 was completed and the start of
commercial development of the project began essentially in July
2003. Construction and other work on site was carried out as
planned in 2003 as part of the current schedule to achieve
commercial production in 2006. We have not received all of the
necessary construction and operating permits we will need for
this project. While we currently anticipate that we will be able
to obtain all such remaining permits on a timely basis, any
failure to obtain, or delay in the issuance of, such permits
could adversely affect the construction or start-up of the
project. In addition, we will need to continue to meet the terms
and conditions under the definitive agreements covering the
development of the Voiseys Bay project reached in October
2002 between the Government of Newfoundland

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and Labrador and us, including the construction
of a demonstration plant to test hydrometallurgical processing
technologies expected to be completed and in operation in 2006.
Depending upon the levels of cash flows we are able to generate,
we may also need to secure financing for the completion of the
development of the three phases of the Voiseys Bay project
on acceptable terms.


In connection with raising the significant
financing which may be required for the commercial development
of the Goro and Voiseys Bay projects, we currently expect
that, in order to be able to meet such financing needs, we could
be required to borrow additional funds and/or issue additional
debt and/or equity or arrange other forms of financing and/or
enter into strategic or other arrangements. Our current plans
for development of Goro include obtaining at least approximately
$350 million in tax-advantaged financing under an existing
French legislative program and certain additional direct or
indirect financial assistance under other government-sponsored
programs. Our current plans also contemplate reaching an
agreement under which a Japanese consortium to be led by
Sumitomo Metal Mining Co., Ltd. would acquire up to a
25 per cent interest in Goro and assume, subject to certain
limitations, the obligation to fund their pro rata share of the
capital costs of the Goro project. There can be no assurance
that these financing and investment arrangements will be
completed or that we will be able to raise additional required
funds on acceptable terms when financing is needed for either
project. As discussed under Uncertainty of Production and
Capital and Other Cost Estimates below, while we have
certain potential new mine development projects at our existing
operations in Canada, as well as additional resources that could
be developed in Indonesia, in addition to the Voiseys Bay
and Goro projects, if sufficient new low-cost sources of nickel
are not developed by us on a timely basis, we currently believe
that our overall nickel production, particularly at our Manitoba
operations, could decline beginning as early as 2005, and our
unit cost of production could increase significantly with any
material decline in mine production from our Ontario and
Manitoba operations if such operations were not significantly
restructured. These developments could materially adversely
affect our business, results of operations, financial condition
and liquidity.






| |                                                                   
| | ------------------------------------------------------------------
| | Uncertainty of Production and Capital and
    Other Cost Estimates

A decrease in the amount of and a change in the
timing of our production outlook for the metals we produce, in
particular nickel, will directly impact the amount and timing of
cash flows. A 10 per cent reduction in the amount of
consolidated planned production of all metals produced would
decrease cash flows estimated for 2004 by approximately
$250 million based on metal prices and costs at
December 31, 2003. The actual impact of such a decrease on
cash flows would depend on the timing and extent of any changes
in prices and costs. In the case of our Canadian and United
Kingdom operations, the time from initial production to
collection of cash from the sale of nickel products produced by
these operations is approximately 21 weeks, while the time
between production of copper and cash collection from copper
sales is about 19 weeks. The production of most of our
precious metals requires the transfer of precious
metals-containing materials to our Acton refinery in the United
Kingdom and the processing time at that facility generally
results in cash collection taking about 31 weeks from first
production of such materials in our Ontario operations. In the
case of PT Inco, the time between nickel-in-matte production,
refining of that intermediate product through our Asian
refineries and collection of cash from the sale of such refined
products is approximately 12 weeks. A change in these cash
flows that would occur due to production shortfalls or labour
disruptions would result in delays in cash flows and using such
cash to reduce debt levels and may require additional borrowings
to fund capital expenditures, including for our development
projects, in the future. In addition, a number of these and
other developments or events, including changes in credit terms,
product mix, demand for our products and production disruptions,
could make historic trends in our cash flows lose their
predictive value.

The level of production and capital and operating
cost estimates relating to our Goro and Voiseys Bay
projects and other projects, which are used in establishing
ore/mineral reserve estimates and for determining and obtaining
financing and other purposes, are based on certain assumptions
and are inherently subject to significant uncertainties. It is
very likely that actual results for our Voiseys Bay and
Goro projects will differ from our current estimates and
assumptions, and these differences may be material. In addition,
as discussed below, experience from actual mining or processing
operations may identify new or unexpected conditions which could
reduce production below, and/or increase capital and/or
operating costs above, our current estimates. If actual

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results are less favorable than we currently
estimate, our business, results of operations, financial
condition and liquidity could be materially adversely impacted.







| |     
| | ----
| | Goro

In September 2002, at the time our Goro project
was experiencing certain labour disruptions, we initiated a
review of the status of certain key aspects of the project,
including the necessary permitting, capital cost estimate,
schedule and organization. Work on the project was generally
curtailed over the September  November 2002 period
but work on certain critical parts of the project, including
engineering, continued during this initial review. In early
December 2002, we announced that we would be undertaking a
comprehensive review of the Goro project. The comprehensive
review was commenced in response to information we received from
the principal firms then providing project engineering,
procurement and construction management services that, if
confirmed, would indicate an increase in the capital cost for
the project in the range of 30 to 45 per cent above the
then current capital cost estimate of $1,450 million. The
objective of the comprehensive review was to assess all
information on our Goro project, including the various cost
estimates and trends, and determine what changes in the capital
cost estimate and the project could be made to maintain the
projects economic feasibility. As a result of the
temporary suspension of certain development activities and other
actions which had been taken by year-end 2002 during this review
process, we recorded a pre-tax charge of $25 million in the
fourth quarter of 2002. This charge was comprised of pre-tax
expenses of $62 million relating to the cancellation or
termination of certain outstanding contractual obligations, to
accrue for demobilization costs and to reduce the carrying value
of certain assets relating to the project, partially offset by
currency gains of $37 million as a result of the
ineffectiveness of certain forward currency contracts that had
been entered into for hedging purposes. As part of the
comprehensive review, we also evaluated various contractual and
other arrangements covering construction and other work relating
to the Goro project and implemented certain actions to suspend
or terminate certain of those contractual arrangements.

As the comprehensive review of the Goro project
that began in December 2002 moved forward during 2003, it
evolved into two phases. The first or initial phase, which was
completed in July 2003, focused on the identification of issues
that had resulted in, or created, actual or potential increases
in capital costs and how those issues could be addressed and
other actions that could be taken to reduce these costs. On
August 13, 2003, we announced the results of the initial
phase of the review. The second phase, or Phase Two, which began
essentially in August 2003, is intended to evaluate further
opportunities to reduce costs and develop, among other key
deliverables, a new capital cost control estimate, project scope
and schedule and execution plan for the project. While one of
our objectives of Phase Two of our review is to have a capital
cost estimate for the project of $1.8 billion, the
conclusion of that review could result in a capital cost
estimate higher than this objective.

As of December 31, 2003, we had spent
approximately $600 million on the Goro project since
July 1, 2001 when this project was formally launched. This
amount excludes a current estimate of approximately
$58 million that would still have to be spent for
equipment, services and other requirements under existing
contracts and commitments, and accruals of approximately
$31 million relating to such requirements as of
December 31, 2003. We currently believe that, based upon
the focus on certain potential new approaches to construction as
part of, and the expected results of, the Phase Two review as it
moves to completion, we will be required to take additional
non-cash charges beyond those taken in the fourth quarter of
2002 but we cannot predict at this time the amount of such
non-cash charges and whether they will have a material effect on
our results of operations or financial condition.

While the key objective of Phase Two of the
review is to have a project that will produce an acceptable rate
of return on the investment to be made in this project, if, upon
completion of this phase of the review, we were to conclude that
the Goro project could not proceed or be restructured to meet
our rate of return on investment requirements, we currently
expect that we would undertake a further evaluation to determine
how the project could be restructured to provide an acceptable
return on the investment to be made. Depending upon the timing
of the completion of such further evaluation, or if that further
evaluation did not occur or did not result in achieving an
acceptable return, we would likely write off all or a
substantial portion of the carrying value of the Goro project,
approximately $802 million at December 31, 2003, and
we would also lose the expected future

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production from Goro. Such a result would have a
material adverse effect on our business, results of operations,
financial condition, profitability and cash flows.







| |           
| | ----------
| | Operations

During 2002, as mine production at our Manitoba
operations transitioned from the Thompson mine to the lower
grade Birchtree mine, we experienced lower mine production. We
continued to experience such lower mine production in 2003 and,
as this transition continues to move forward, we currently
expect to see a continuing decline in mine production in
Manitoba in 2004 and expect to see further declines in future
years. We have recently been relying upon, and expect that we
will continue to rely, on an increasing basis, upon the
availability of purchased intermediates to maintain
Manitobas nickel production at around the 45,000 tonne
annual level in 2004. While we have entered into agreements and
other arrangements to purchase intermediates to maintain
Manitobas production levels at or near the
45,000 tonne annual level for the next few years, until the
Voiseys Bay project produces intermediates in the form of
concentrates for further processing at our Manitoba and Ontario
operations, if suppliers of the purchased intermediates were to
experience production problems or other disruptions which would
adversely affect their supply of such intermediates to us or
reduce their shipments of concentrate below our requirements,
this could have a material adverse effect on our nickel
production, business, results of operations, financial condition
and liquidity.




Voiseys
Bay

We announced in late March 2003 (i) the
results of our bankable feasibility study for the mine and
concentrator for the Ovoid and adjacent surface deposits and
related facilities representing part of the initial phase of the
Voiseys Bay project and (ii) that we planned to
proceed with this initial phase. Based upon the results of the
study, the estimated total capital cost for the mine and 6,000
tonne-per day concentrator and related facilities representing
the mine, concentrator and related facilities and infrastructure
in the Voiseys Bay area (the Mine/ Concentrator
Project) was estimated to be $582 million, including
$35 million spent since July 2002 on infrastructure and
related work. The $582 million amount represented an
increase of $77 million or about 15 per cent over the
prefeasibility study estimates for the Mine/ Concentrator
Project. This estimate included a $54 million contingency.
The initial phase of the Voiseys Bay project will also
involve a research and development program covering
hydrometallurgical processing technologies (the Hydromet
R&D Program) for the treatment of the Voiseys
Bay nickel and cobalt-containing concentrates to be produced
into finished nickel and cobalt product, including a
demonstration plant to be constructed in Argentia, Newfoundland.
In March of 2003, the Hydromet R&D Program was expected to
cost approximately $134 million or about 14 per cent
above the initial estimate for this program. It is possible that
the cost of this program may be higher but we cannot currently
predict what the increase in such cost will be. In addition to
the Mine/ Concentrator Project and the Hydromet R&D Program,
the initial phase will include handling facilities to be
constructed at our Canadian operations for the nickel and
cobalt-containing concentrates to be processed over the
2006  2011 period once the Mine/ Concentrator Project
and the demonstration plant are in operation, at an estimated
cost of $47 million, and an exploration program at an
estimated cost of $13 million. The total capital cost
estimate for all four parts of the initial phase of the
Voiseys Bay project is $776 million, or about
14 per cent above the original estimate of
$680 million. The engineering firm retained to complete the
study indicated that it believed that the capital cost estimate
was within a range of plus 15 per cent and minus 5 per
cent of the $547 million figure to be spent on a going
forward basis for the Mine/ Concentrator Project. Given that we
currently expect that a significant portion of these costs will
be incurred in Canadian dollars, we have entered into Canadian
dollar hedges for approximately 68 per cent of the total
expected capital expenditures in Canadian dollars for the
related assets, including Cdn. $535 million of hedges
at an average exchange rate of $0.746 which had been entered
into as at March 12, 2004. The $776 million estimate
assumed a Canadian dollar-U.S. dollar exchange rate of
approximately Cdn.$1.00 to $0.66. At exchange rates in effect at
March 12, 2004, taking into consideration the forward
currency contracts noted above, this estimate would be
$888 million. To the extent that this currency exposure is
not hedged at exchange rates equivalent to this assumed rate,
then this capital cost estimate could rise, adversely affecting
the projected returns on our investment in this project.

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Construction
Risks and Technological Risks

The mine, processing plant and related
infrastructure required for development of the Goro and
Voiseys Bay projects have not yet been constructed and no
commercial mining has commenced. While construction of the
initial phase of the Voiseys Bay project began in 2003 and
certain necessary construction and other permits have been
obtained in respect of the Goro and Voiseys Bay projects
and detailed exploration and related studies with respect to the
Goro project and a portion of the Voiseys Bay project have
been completed based on (1) significant surface exploratory
drilling, (2) extensive investigations of certain of the
mineralization delineated to date, (3) construction and
mine plans, and (4) production and cost estimates, we are
not currently in a position to predict when all of the required
approvals would be in place for us to develop either project
and, in the case of the Goro project, when construction, beyond
the $6 million in limited interim construction work we
currently plan to complete in early 2004 during Phase Two of our
review of that project, would be restarted given the current
timetable for the completion and results of such Phase Two as
discussed under Risks and Uncertainties  Other
Risks and Uncertainties  Uncertainty of Production
and Capital and Other Cost Estimates above, currently
being undertaken, and, in the case of the Voiseys Bay
project, when construction will be completed. Depending on the
severity of winter conditions and other factors applicable to
the Voiseys Bay project, a period of approximately
36 months from site mobilization will be required to
complete construction of the initial phase after all necessary
approvals and permits have been secured. After completion of
certain preliminary work on site during the second half of 2002,
construction and related work, including site mobilization, for
the initial phase of the Voiseys Bay project began in July
2003 and, as discussed above, we met our targets for
construction work to be completed in 2003.

Unforeseen conditions or developments could arise
during the construction period for either project which could
delay or prevent completion, and/or substantially increase the
cost of construction of the necessary facilities and
infrastructure to develop the Goro and the Voiseys Bay
projects. Such events may include, without limitation, shortages
of equipment, materials or labour, delays in delivery of
equipment or materials, labour disruptions, political events,
local or political opposition, civil disturbances, litigation,
adverse weather conditions, unanticipated increases in costs,
natural or man-made disasters, accidents and unforeseen
engineering, technical and technological, design, environmental,
geological or geotechnical problems. Any delay in construction
would delay the production of nickel and other products from the
Goro and/or the Voiseys Bay projects, and the expected
significant source of revenue for us that production from these
projects would represent. Any such delay could also materially
adversely impact our business, results of operations, financial
condition and liquidity. Our Goro project will involve the
application of new processing and other technologies and,
depending upon the results of the Hydromet R&D Program we
plan to conduct for our Voiseys Bay project, as described
above, that project could also utilize new processing and other
technologies to produce one or more refined or finished nickel
products. There can be no assurance that these technologies will
be successfully developed and applied on a commercial basis or
that the costs associated with and/or the timing of their
implementation will not have a material adverse effect on the
timing of the start-up of commercial production, the capital
and/or operating costs for either or both projects and on other
factors impacting the profitability of these projects. These
events could materially adversely impact our business, results
of operations, financial condition and liquidity.






| |                         
| | ------------------------
| | Governmental Regulations

In addition to environmental regulations referred
to above, the mining and metals industry in Canada operates
under federal, provincial and municipal legislation, regulation
and intervention by governments in such matters as land tenure,
limitations on areas in which mining can be conducted,
production rates, income and other taxes and the export of ore
and other products, as well as other matters. Our operations in
Indonesia, the United Kingdom, New Caledonia and in other
countries outside Canada are also subject to various
environmental and other applicable laws and regulations and
governmental interventions, some of which are similar to those
in Canada and all of which are subject to change. The mining and
metals industry is also subject to regulation and intervention
by governments in such matters as control over the development
and abandonment of mine sites (including restrictions on
production) and possible expropriation or cancellation of
contract and mineral rights. Before proceeding with major
projects, including significant changes to existing operations,
we must obtain regulatory approvals. The regulatory approval
process can involve stakeholder consultation, environmental
impact

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assessments and public hearings, among other
things. In addition, regulatory approvals may be subject to
conditions, including the obligation to post security deposits
and other financial commitments. Failure to obtain regulatory
approvals, or failure to obtain them on a timely basis, could
result in delays and abandonment or restructuring of projects
and increased costs, all of which could negatively affect our
profitability and cash flows. In addition, such regulations may
be changed from time to time in response to economic or
political conditions, and the implementation of new regulations
or the modification of existing regulations affecting the mining
and metals industry could increase our costs and have a material
adverse impact on business, results of operations, financial
condition and liquidity.


There can be no assurance that we will be in
compliance with all applicable statutes or regulations at all
times or that steps to bring us into compliance would not
materially adversely impact our business, results of operations,
liquidity or financial condition. Reference is made to
Risks and Uncertainties  Environmental
Risks above.






| |                                             
| | --------------------------------------------
| | Capital Requirements and Operating
    Risks

As discussed under Cash Flows, Liquidity
and Capital Resources  Contractual Obligations and
Commercial Commitments above, each of our two current
principal primary metals business units, the Canadian and United
Kingdom operations and PT Inco, has required, and is expected to
continue to require, certain levels of investment to sustain
their current levels of production. For 2004, as discussed under
Outlook  2004 Planned Capital Expenditures and
Production below, we currently forecast capital
expenditures totalling approximately $1,040 million for
2004, covering sustaining capital for our current primary metals
business units as well as planned expenditures for our Goro and
Voiseys Bay projects and other development projects. This
total amount assumes a level of capital expenditures for our
Goro project of $220 million, which may be higher or lower
depending upon the results of the second phase of the review
process referred to under Results of
Operations  2003 Compared with 2002  Goro
Project Suspension Costs above and assuming that we decide
to proceed with the project in the summer of 2004, and other
developments, and $430 million for the initial phase of our
Voiseys Bay project. To meet such capital expenditures
requirements for 2004 and at least until 2006 given the current
projected expenditure for our two development projects, we must
generate sufficient internal cash flows and/or be able to
utilize available financing sources.

In addition, our mining operations and processing
and related infrastructure facilities are subject to risks
normally encountered in the mining and metals industry. Such
risks include, without limitation, environmental hazards,
industrial accidents, labour disputes, changes in laws,
technical difficulties or failures, late delivery of supplies or
equipment, unusual or unexpected geological formations or
pressures, cave-ins, pit-wall failures, rock falls,
unanticipated ground, grade or water conditions, flooding,
periodic or extended interruptions due to the unavailability of
materials and force majeure events. Such risks could result in
damage to, or destruction of, mineral properties or producing
facilities, personal injury, environmental damage, delays in
mining or processing, losses and possible legal liability. Any
prolonged downtime or shutdowns at our mining or processing
operations could materially adversely affect our business,
results of operations, financial condition and liquidity.

The wholesale electricity markets in Ontario were
deregulated for a portion of 2002 and as a result we experienced
fluctuations in some of our electricity costs at the Ontario
operations. Depending upon future changes in the regulatory
environment for these markets, we could experience future
fluctuations in such costs. We have from time to time
experienced adverse production and production cost trends at our
operations in Canada and elsewhere and could experience similar
adverse trends in the future.






| |                 
| | ----------------
| | Labour Relations

Collective agreements with unionized hourly
production and maintenance workers at our Ontario operations
ended on May 31, 2003. We were not able to negotiate new
collective agreements by that date and these workers went on
strike, with the strike lasting until August 29, 2003 when
new collective agreements expiring on May 31, 2006 were
entered into by the Company and the local unions representing
these workers. This strike had a material adverse effect on our
2003 production of nickel, copper and certain other metals and
results of operations, profitability and cash flows for 2003. A
three-year collective agreement with our unionized office,

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clerical and technical employees at our Ontario
operations remains in effect until March 31, 2004. While
preliminary negotiations covering a new collective agreement
with these employees have been held, we cannot predict whether a
new agreement will be entered into without a labour disruption.
We do not believe that such a disruption would have an adverse
effect on production at our Ontario operations. On
September 15, 2002, a new three-year collective agreement
with our unionized workers at our Manitoba operations was
successfully negotiated. Our PT Inco subsidiary entered into a
new two-year collective labour agreement with its union in
January 2003 which expires in December 2004. While there were no
significant problems in reaching this latest agreement with PT
Incos labour force, with the increased potential for
actions of non-government organizations and other activist
groups, the current uncertain economic and political situation
in Indonesia and the general increase in labour activism in that
country, there can be no assurance that such activism will not
adversely affect PT Incos ability to successfully operate.
Any disruption in PT Incos operations as a result of
labour issues or other issues may adversely affect its
operations and could materially adversely impact our business,
results of operations, financial condition and liquidity. At
Goro, we currently have two unions representing some of our
employees. In early September 2002, Goro experienced labour
disruptions by personnel associated with certain project
construction subcontractors. As a result of these disruptions,
the decision was made in late September 2002 to curtail certain
activities at the projects site to enable the project
company, Goro Nickel S.A., contractors, subcontractors and other
interested parties to develop procedures to avoid future
disruptions. A number of procedures were put in place prior to
the start of the comprehensive review in early December 2002 and
we have been seeking to complete the implementation of these and
other procedures as part of the negotiation of labour, site or
other, accords to help minimize any such disruptions in the
future. Through an employers association, of which we are
the controlling member, we negotiated a collective agreement
effective September 2002 covering the construction of the first
phase of the Voiseys Bay project.


There can be no assurance that we will be able to
maintain positive relationships with our employees at our
operations in Canada and elsewhere or that new collective
agreements will be entered into without work interruptions as in
the case of the three-month strike at our Ontario operations in
2003. We could also be adversely affected by labour disruptions
involving third parties who may provide us with goods or
services at our operations in Canada and elsewhere. For example,
as discussed above, our Goro project experienced labour
disruptions by certain employees of the projects
construction subcontractors. Strikes and other labour
disruptions at any of our operations and lengthy work
interruptions at our Goro or Voiseys Bay projects could
materially adversely affect the timing of completion and the
cost of either project, as well as our business, results of
operations, financial condition and liquidity.






| |                                     
| | ------------------------------------
| | Uncertainty of Ore Reserve Estimates

Our reported ore reserves as of December 31,
2003 are estimated quantities of proven and probable ore that,
under present and anticipated conditions, can be legally and
economically mined and processed by the extraction of their
mineral content. We determine the amount of our ore reserves in
accordance with the requirements of the applicable securities
regulatory authorities and established industry practices. To
the extent that we are required by regulatory authorities to
change the metal prices, expenditures and other assumptions we
use in preparing these estimates, then these estimates could
change significantly. The volume and grade of reserves actually
recovered and rates of production from our present ore reserves
may be less than geological measurements of the reserves.
Furthermore, market price fluctuations in nickel, other metals
and exchange rates, and changes in operating and capital costs
may in the future render certain ore reserves uneconomic to mine
and result in significant reductions in our reported estimates
of proven and probable ore reserves.

No assurance can be given that the indicated
amount of ore will be recovered or that it will be recovered at
the rates anticipated by us. Our ore reserve estimates are based
on limited sampling and, consequently, are uncertain because the
samples may not be representative of the entire orebody. As more
knowledge and understanding of the orebody is obtained, the
reserve estimates may change significantly, either positively or
negatively.

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Sensitivities

Our financial results are sensitive to, among
other things, changes in prices for nickel and other metals, the
Canadian-U.S. dollar exchange rate and interest rates. Our
financial results are also affected by changes in the Indonesian
rupiah-U.S. dollar exchange rate, but to a lesser extent
since PT Incos revenues and many of its expenses are
denominated in U.S. dollars. We have changed our
methodology to calculate the impact on our basic net earnings
per share of a 10 per cent change in the market risk
exposures that we believe have the most significant impact on
our net earnings. Based on this methodology, the following table
shows the approximate full-year impact of a 10 per cent change
in our principal market risk exposures on our basic net earnings
per share based on planned 2004 deliveries of Inco-source metals
and after taking into consideration our principal derivative
instrument positions as of December 31, 2003. These market
risk exposures have been selected as management believes they
have had, and are currently expected to continue to have, the
most significant impact on our net earnings per share:

|                                      |                                                     |            |                |                              |  |  |      |      | 
|------------------------------------- | --------------------------------------------------- | ---------- | -------------- | ---------------------------- |  |  | ---- | ---- | 
|                                      |                                                     |            |                | Impact on Basic Net Earnings
|Sensitivities as of December 31, 2003 |                                                     | 10% change |                | per Share(1)                
|                                      |                                                     |            |                |                             
|Metals                                |                                                     |            |                |                              |  |  |      |     
|                                      | Nickel                                              |            | $              | 0.76 per pound               |  |  | $    | 0.89 | 
|                                      | Copper                                              |            |                | 0.10 per pound               |  |  |      | 0.09 | 
|                                      | Cobalt                                              |            |                | 2.23 per pound               |  |  |      | 0.03 | 
|                                      | Platinum                                            |            |                | 81.00 per troy ounce         |  |  |      | 0.03 | 
|                                      | Palladium                                           |            |                | 19.00 per troy ounce         |  |  |      | 0.01 | 
|Energy                                |                                                     |            |                |                              |  |  |      |     
|                                      | Fuel Oil                                            |            |                | 2.44 per bbl                 |  |  |      | 0.02 | 
|                                      | Natural Gas                                         |            |                | 0.68 per MM BTU              |  |  |      | 0.01 | 
|Currencies                            |                                                     |            |                |                              |  |  |      |     
|                                      | U.S. $1.00 per Cdn                                  |            | $              | 0.077 cents                  |  |  |      | 0.87 | 
|                                      | U.S. $1.00 per Indonesian rupiah
    (per thousand) |            |                | 0.01 cents                   |  |  |      | 0.01 | 
|Share appreciation rights             |                                                     |            | 4.00 per share |                              |  |  | 0.03 |     



---



|    |                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------
|(1) | Canadian GAAP basic net earnings per share. Each
    sensitivity assumes other factors are held constant.

As indicated in the table above, the most
significant sensitivities in terms of the effect on our basic
net earnings per share are nickel prices and the Canadian
dollar-U.S. dollar exchange rate.

Cash expenditures for our development projects
will be incurred primarily in Canadian dollars for our
Voiseys Bay project and in Australian dollars and Euros
for our Goro project. Although changes in these currencies will
affect the ultimate carrying value of the related assets in
U.S. dollar terms, they will not have any impact on our
earnings until such projects are fully developed and have
achieved commercial start-up when they will be subject to
depreciation in accordance with our depreciation policy
(reference is made to note 1 to our 2003 consolidated
financial statements). A 10 per cent change in each of the
value of the Australian dollar and Euro relative to the
U.S. dollar as at December 31, 2003 would change
currently planned 2004 capital expenditures for the Goro
project, assuming that a decision to proceed with the project is
made in the summer of 2004, by $3 million and
$6 million, respectively, after taking into consideration
outstanding derivative contracts as at December 31, 2003. A
10 per cent change in the value of the Canadian dollar
relative to the U.S. dollar at December 31, 2003 would
change planned 2004 capital expenditures for the Voiseys
Bay project by $30 million after taking into consideration
outstanding derivative instruments as at December 31, 2003.
After taking into consideration the additional forward currency
contracts entered into during the January 2, 2004 to
March 12, 2004 period in respect of the Voiseys Bay
project, a 10 per cent change in the value of the Canadian
dollar relative to the U.S. dollar at December 31,
2003 would change planned 2004 capital expenditures for the
Voiseys Bay project by $10 million.

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The following represents the sensitivity analysis
as of December 31, 2002 prepared using the same methodology
as above for comparative purposes:

|                                      |                                                     |            |                |                              |  |  |      |      | 
|------------------------------------- | --------------------------------------------------- | ---------- | -------------- | ---------------------------- |  |  | ---- | ---- | 
|                                      |                                                     |            |                | Impact on Basic Net Earnings
|Sensitivities as of December 31, 2002 |                                                     | 10% change |                | per Share(1)                
|                                      |                                                     |            |                |                             
|Metals                                |                                                     |            |                |                              |  |  |      |     
|                                      | Nickel                                              |            | $              | 0.32 per pound               |  |  | $    | 0.37 | 
|                                      | Copper                                              |            |                | 0.07 per pound               |  |  |      | 0.06 | 
|                                      | Cobalt                                              |            |                | 0.67 per pound               |  |  |      | 0.01 | 
|                                      | Platinum                                            |            |                | 60.00 per troy ounce         |  |  |      | 0.01 | 
|                                      | Palladium                                           |            |                | 23.00 per troy ounce         |  |  |      | 0.01 | 
|Energy                                |                                                     |            |                |                              |  |  |      |     
|                                      | Fuel Oil                                            |            |                | 2.63 per bbl                 |  |  |      | 0.01 | 
|                                      | Natural Gas                                         |            |                | 0.52 per MM BTU              |  |  |      | 0.01 | 
|Currencies                            |                                                     |            |                |                              |  |  |      |     
|                                      | U.S. $1.00 per Cdn$                                 |            |                | 0.063 cents                  |  |  |      | 0.82 | 
|                                      | U.S. $1.00 per Indonesian rupiah
    (per thousand) |            |                | 0.01 cents                   |  |  |      | 0.01 | 
|Share appreciation rights             |                                                     |            | 2.12 per share |                              |  |  | 0.01 |     



---



|    |                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------
|(1) | Canadian GAAP basic net earnings per share. Each
    sensitivity assumes other factors are held constant.

While the sensitivity analyses presented in the
tables above represent our best estimate of the impact of
specified assumed changes in the identified market risk
scenarios, actual results could differ from those reflected. The
sensitivity analyses presented are subject to various
limitations and uncertainties which may affect the impact on
basic net earnings per share.

These sensitivity analyses have been prepared
based on a change of 10 per cent in the market rates or
prices at December 31, 2003 and 2002. The impact on basic
net earnings per share has been determined based on discrete
changes in the identified risks. If there are changes in two or
more of the identified risks, the above impact on basic net
earnings per share may not accurately reflect the actual impact
on our net earnings per share.

These sensitivity analyses also include
assumptions relating to our then projected operations during
2004 in the case of the sensitivity analyses as of
December 31, 2003 and during 2003 in the case of the
sensitivity analysis as of December 31, 2002. As we are
affected and influenced by changes in the business and economic
environments in which we operate, the changes reflected in the
sensitivity analyses above may be different or may prove to be
inaccurate, including in relation to their impact on basic net
earnings per share. The most significant assumptions which may
be affected relate to levels of production, consumption rates,
forecasted costs of production, tax rates and deliveries.

These sensitivity analyses provided are not
intended to fully reflect the net market risk exposures since
certain exposures would encompass events that are uncertain or
could not be foreseen. Some of these events are outlined in our
discussion above on Risks and Uncertainties
affecting our business. For example, with respect to metal
prices, extended declines in prices, particularly nickel prices,
due to unusual economic developments or other unforeseen events
would have a material adverse effect on our results of
operations, financial condition and cash flows. In addition,
unusual or irrational actions by competitors could, for example,
change the nickel market supply-demand relationship and other
factors fundamental to our business causing declines in metal
prices. In addition, significant and prolonged increases in
energy prices and/or the Canadian dollar relative to the
U.S. dollar would have a material adverse effect on our
costs of production, results of operations and financial
condition. There are also a wide range of other uncertainties in
the business environment that could result in material
limitations with respect to the accuracy of the sensitivity
analyses for net market risk exposures, including cost
inflation, relations with our employees, avoidance of major
accidents at our producing locations, and the average grades of
ore mined and the certainty of estimated proven and probable ore
reserves at our operations. Unanticipated changes in
environmental laws and regulations could also result in limits
on production and/or significantly increased capital spending to
meet such changes.

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| |                                    
| | -----------------------------------
| | Derivative Instrument
    Positions

As supplemental information, the following table
shows the notional amounts of our principal derivative
instrument positions as at December 31, 2003:

|                        |                                                  |      |        |         |   |      |        |         |   |  |   |         |   |  |         |         |  
|----------------------- | ------------------------------------------------ | ---- | ------ | ------- | - | ---- | ------ | ------- | - |  | - | ------- | - |  | ------- | ------- | -
|As of December 31, 2003 |                                                  | 2004 |        | 2005    |   | 2006 |        | Total  
|                        |                                                  |      |        |         |   |      |        |        
|Metals                  |                                                  |      |        |         |   |      |        |         |   |  |   |         |   |  |         |        
|                        | LME Forward Nickel Purchase Contracts(1)(tonnes) |      |        | 8,058   |   |      |        | 768     |   |  |   | 222     |   |  |         | 9,048   |  
|                        | Average price ($ per tonne)                      |      |        | 12,706  |   |      |        | 8,442   |   |  |   | 8,850   |   |  |         | 12,250  |  
|                        | Contract amount (in $ millions)                  |      |        | 102     |   |      |        | 7       |   |  |   | 2       |   |  |         | 111     |  
|                        | Fair value (in $ millions)                       |      |        | 28      |   |      |        | 4       |   |  |   | 1       |   |  |         | 33      |  
|                        |                                                  |      |        |         |   |      |        |         |   |  |   |         |   |  |         |        
|                        | LME Forward Nickel Sell Contracts(2)(tonnes)     |      |        | 4,104   |   |      |        |        |   |  |   |        |   |  |         | 4,104   |  
|                        | Average price ($ per tonne)                      |      |        | 15,858  |   |      |        |        |   |  |   |        |   |  |         | 15,858  |  
|                        | Contract amount (in $ millions)                  |      |        | 65      |   |      |        |        |   |  |   |        |   |  |         | 65      |  
|                        | Fair value (in $ millions)                       |      |        | (3      | ) |      |        |        |   |  |   |        |   |  |         | (3      | )
|                        |                                                  |      |        |         |   |      |        |         |   |  |   |         |   |  |         |        
|                        | Palladium Fixed Price Swaps (troy ounces)        |      |        |        |   |      |        | 9,390   |   |  |   |        |   |  |         | 9,390   |  
|                        | Average price ($ per troy ounce)                 |      |        |        |   |      |        | 295     |   |  |   |        |   |  |         | 295     |  
|                        | Contract amount (in $ millions)                  |      |        |        |   |      |        | 3       |   |  |   |        |   |  |         | 3       |  
|                        | Fair value (in $ millions)                       |      |        |        |   |      |        | 1       |   |  |   |        |   |  |         | 1       |  
|                        |                                                  |      |        |         |   |      |        |         |   |  |   |         |   |  |         |        
|                        | Platinum Fixed Price Swaps (troy ounces)         |      |        | 39,600  |   |      |        | 30,828  |   |  |   | 12,000  |   |  |         | 82,428  |  
|                        | Average price ($ per tonne)                      |      |        | 634     |   |      |        | 647     |   |  |   | 651     |   |  |         | 641     |  
|                        | Contract amount (in $ millions)                  |      |        | 25      |   |      |        | 20      |   |  |   | 8       |   |  |         | 53      |  
|                        | Fair value (in $ millions)                       |      |        | (6      | ) |      |        | (4      | ) |  |   | (1      | ) |  |         | (11     | )
|                        |                                                  |      |        |         |   |      |        |         |   |  |   |         |   |  |         |        
|                        | Gold Fixed Price Swaps (troy ounces)             |      |        | 30,648  |   |      |        | 29,956  |   |  |   |        |   |  |         | 60,604  |  
|                        | Average price ($ per troy ounce)                 |      |        | 387     |   |      |        | 390     |   |  |   |        |   |  |         | 388     |  
|                        | Contract amount (in $ millions)                  |      |        | 12      |   |      |        | 12      |   |  |   |        |   |  |         | 24      |  
|                        | Fair value (in $ millions)                       |      |        | (1      | ) |      |        | (1      | ) |  |   |        |   |  |         | (2      | )
|                        |                                                  |      |        |         |   |      |        |         |   |  |   |         |   |  |         |        
|                        | Platinum range forward options (troy ounces)     |      |        | 30,774  |   |      |        | 19,540  |   |  |   | 10,003  |   |  |         | 60,317  |  
|                        | Average (minimum-maximum) ($ per troy ounce)     |      |        | 618-753 |   |      |        | 678-812 |   |  |   | 651-785 |   |  |         | 643-777 |  
|                        | Contract amount (in $ millions)                  |      |        | 19-23   |   |      |        | 13-16   |   |  |   | 7-8     |   |  |         | 39-47   |  
|                        | Fair value (in $ millions)                       |      |        | (2      | ) |      |        | (1      | ) |  |   |        |   |  |         | (3      | )
|                        |                                                  |      |        |         |   |      |        |         |   |  |   |         |   |  |         |        
|                        | Gold range forward options (troy ounces)         |      |        | 15,324  |   |      |        |        |   |  |   |        |   |  |         | 15,324  |  
|                        | Average (minimum-maximum) ($ per troy ounce)     |      |        | 345-415 |   |      |        |        |   |  |   |        |   |  |         | 345-415 |  
|                        | Contract amount (in $ millions)                  |      |        | 5-6     |   |      |        |        |   |  |   |        |   |  |         | 5-6     |  
|                        | Fair value (in $ millions)                       |      |        |        |   |      |        |        |   |  |   |        |   |  |         |        |  
|                        |                                                  |      |        |         |   |      |        |         |   |  |   |         |   |  |         |        
|Fuel Oil Swaps (tonnes) |                                                  |      | 80,000 |         |   |      | 40,000 |         |   |  |  |         |   |  | 120,000 |        
|                        | Average Price ($ per tonne)                      |      |        | 132     |   |      |        | 136     |   |  |   |        |   |  |         | 134     |  
|                        | Contract amount (in $ millions)                  |      |        | 11      |   |      |        | 5       |   |  |   |        |   |  |         | 16      |  
|                        | Fair value (in $ millions)                       |      |        | 3       |   |      |        | 1       |   |  |   |        |   |  |         | 4       |  
|                        |                                                  |      |        |         |   |      |        |         |   |  |   |         |   |  |         |        
|Currencies              |                                                  |      |        |         |   |      |        |         |   |  |   |         |   |  |         |        
|                        | Cdn.$ forward contracts (millions)               |      |        | 85      |   |      |        |        |   |  |   |        |   |  |         | 85      |  
|                        | Average price (U.S.$)                            |      |        | 0.717   |   |      |        |        |   |  |   |        |   |  |         | 0.717   |  
|                        | Contract amount (in $ millions)                  |      |        | 61      |   |      |        |        |   |  |   |        |   |  |         | 61      |  
|                        | Fair value (in $ millions)                       |      |        | 4       |   |      |        |        |   |  |   |        |   |  |         | 4       |  
|                        |                                                  |      |        |         |   |      |        |         |   |  |   |         |   |  |         |        

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|                                                                                  |                                 |      |   |       |  |      |   |       |  |  |   |   |  |  |     |       | 
|--------------------------------------------------------------------------------- | ------------------------------- | ---- | - | ----- |  | ---- | - | ----- |  |  | - | - |  |  | --- | ----- | 
|As of December 31, 2003                                                           |                                 | 2004 |   | 2005  |  | 2006 |   | Total
|                                                                                  |                                 |      |   |       |  |      |   |      
|                                                                                  | Aus. $(millions)                |      |   | 66    |  |      |   |      |  |  |   |  |  |  |     | 66    | 
|                                                                                  | Average price (U.S.$)           |      |   | 0.525 |  |      |   |      |  |  |   |  |  |  |     | 0.525 | 
|                                                                                  | Contract amount (in $ millions) |      |   | 35    |  |      |   |      |  |  |   |  |  |  |     | 35    | 
|                                                                                  | Fair value (in $ millions)      |      |   | 22    |  |      |   |      |  |  |   |  |  |  |     | 22    | 
|                                                                                  |                                 |      |   |       |  |      |   |       |  |  |   |   |  |  |     |      
|                                                                                  | Euro (millions)                 |      |   | 40    |  |      |   |      |  |  |   |  |  |  |     | 40    | 
|                                                                                  | Average price (U.S.$)           |      |   | 0.873 |  |      |   |      |  |  |   |  |  |  |     | 0.873 | 
|                                                                                  | Contract amount (in $ millions) |      |   | 35    |  |      |   |      |  |  |   |  |  |  |     | 35    | 
|                                                                                  | Fair value (in $ millions)      |      |   | 21    |  |      |   |      |  |  |   |  |  |  |     | 21    | 
|                                                                                  |                                 |      |   |       |  |      |   |       |  |  |   |   |  |  |     |      
|Interest Rate Swaps (notional principal amount in
    $ millions) (maturity 2012) |                                 |      |  |       |  |      |  |       |  |  |  |   |  |  | 400 |      
|                                                                                  | (maturity 2015)                 |      |   |      |  |      |   |      |  |  |   |  |  |  |     | 300   | 
|                                                                                  | Fair value (in $ millions)      |      |   |      |  |      |   |      |  |  |   |  |  |  |     | 2     | 
|                                                                                  |                                 |      |   |       |  |      |   |       |  |  |   |   |  |  |     |      



---



|    |                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | LME nickel purchase contracts were substantially
    offset by fixed price customer contracts with identical terms to
    more fully expose us to nickel price risk.
|(2) | LME nickel sell contracts were entered into to
    minimize the nickel price risk associated with purchased nickel
    inventories.                                 

The following table shows the notional amounts of
our principal derivative instrument positions as at
December 31, 2002:

|                        |                                                  |      |        |        |   |      |        |       |  |  |   |       |  |  |         |        |  
|----------------------- | ------------------------------------------------ | ---- | ------ | ------ | - | ---- | ------ | ----- |  |  | - | ----- |  |  | ------- | ------ | -
|As of December 31, 2002 |                                                  | 2003 |        | 2004   |   | 2005 |        | Total
|                        |                                                  |      |        |        |   |      |        |      
|Metals                  |                                                  |      |        |        |   |      |        |       |  |  |   |       |  |  |         |       
|                        | LME Forward Nickel Purchase Contracts(1)(tonnes) |      |        | 7,158  |   |      |        | 504   |  |  |   | 402   |  |  |         | 8,064  |  
|                        | Average price ($ per tonne)                      |      |        | 6,314  |   |      |        | 6,148 |  |  |   | 5,996 |  |  |         | 6,288  |  
|                        | Contract amount (in $ millions)                  |      |        | 45     |   |      |        | 3     |  |  |   | 3     |  |  |         | 51     |  
|                        | Fair value (in $ millions)                       |      |        | 6      |   |      |        | 1     |  |  |   |      |  |  |         | 7      |  
|                        |                                                  |      |        |        |   |      |        |       |  |  |   |       |  |  |         |       
|                        | Palladium Fixed Price Swaps (troy ounces)        |      |        | 15,330 |   |      |        |      |  |  |   | 9,390 |  |  |         | 24,720 |  
|                        | Average price ($ per troy ounce)                 |      |        | 830    |   |      |        |      |  |  |   | 295   |  |  |         | 627    |  
|                        | Contract amount (in $ millions)                  |      |        | 13     |   |      |        |      |  |  |   | 3     |  |  |         | 16     |  
|                        | Fair value (in $ millions)                       |      |        | 9      |   |      |        |      |  |  |   | 1     |  |  |         | 10     |  
|                        |                                                  |      |        |        |   |      |        |       |  |  |   |       |  |  |         |       
|                        | Platinum Fixed Price Swaps (troy ounces)         |      |        | 62,400 |   |      |        | 7,260 |  |  |   |      |  |  |         | 69,660 |  
|                        | Average price ($ per troy ounce)                 |      |        | 550    |   |      |        | 555   |  |  |   |      |  |  |         | 551    |  
|                        | Contract amount (in $ millions)                  |      |        | 34     |   |      |        | 4     |  |  |   |      |  |  |         | 38     |  
|                        | Fair value (in $ millions)                       |      |        | (3     | ) |      |        |      |  |  |   |      |  |  |         | (3     | )
|                        |                                                  |      |        |        |   |      |        |       |  |  |   |       |  |  |         |       
|Fuel Oil Swaps (tonnes) |                                                  |      | 90,000 |        |   |      | 30,000 |       |  |  |  |       |  |  | 120,000 |       
|                        | Average price ($ per tonne)                      |      |        | 119    |   |      |        | 130   |  |  |   |      |  |  |         | 122    |  
|                        | Contract amount (in $ millions)                  |      |        | 11     |   |      |        | 4     |  |  |   |      |  |  |         | 15     |  
|                        | Fair value (in $ millions)                       |      |        | 2      |   |      |        | 1     |  |  |   |      |  |  |         | 3      |  
|                        |                                                  |      |        |        |   |      |        |       |  |  |   |       |  |  |         |       
|Currencies              |                                                  |      |        |        |   |      |        |       |  |  |   |       |  |  |         |       
|                        | Cdn.$ forward contracts (millions)               |      |        | 20     |   |      |        |      |  |  |   |      |  |  |         | 20     |  
|                        | Average price (U.S.$)                            |      |        | 0.643  |   |      |        |      |  |  |   |      |  |  |         | 0.643  |  
|                        | Contract amount (in $ millions)                  |      |        | 13     |   |      |        |      |  |  |   |      |  |  |         | 13     |  
|                        | Fair value (in $ millions)                       |      |        |       |   |      |        |      |  |  |   |      |  |  |         |       |  
|                        |                                                  |      |        |        |   |      |        |       |  |  |   |       |  |  |         |       

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|                                                                                  |                                 |      |   |       |  |      |   |       |  |  |   |   |  |  |     |       | 
|--------------------------------------------------------------------------------- | ------------------------------- | ---- | - | ----- |  | ---- | - | ----- |  |  | - | - |  |  | --- | ----- | 
|As of December 31, 2002                                                           |                                 | 2003 |   | 2004  |  | 2005 |   | Total
|                                                                                  |                                 |      |   |       |  |      |   |      
|                                                                                  | Aus. $(millions)                |      |   | 274   |  |      |   | 116   |  |  |   |  |  |  |     | 390   | 
|                                                                                  | Average price (U.S.$)           |      |   | 0.518 |  |      |   | 0.522 |  |  |   |  |  |  |     | 0.519 | 
|                                                                                  | Contract amount (in $ millions) |      |   | 142   |  |      |   | 60    |  |  |   |  |  |  |     | 202   | 
|                                                                                  | Fair value (in $ millions)      |      |   | 8     |  |      |   | 2     |  |  |   |  |  |  |     | 10    | 
|                                                                                  |                                 |      |   |       |  |      |   |       |  |  |   |   |  |  |     |      
|                                                                                  | Euro (millions)                 |      |   | 213   |  |      |   | 60    |  |  |   |  |  |  |     | 273   | 
|                                                                                  | Average Price (U.S.$)           |      |   | 0.886 |  |      |   | 0.873 |  |  |   |  |  |  |     | 0.883 | 
|                                                                                  | Contract amount (in $ millions) |      |   | 189   |  |      |   | 52    |  |  |   |  |  |  |     | 241   | 
|                                                                                  | Fair value (in $ millions)      |      |   | 42    |  |      |   | 10    |  |  |   |  |  |  |     | 52    | 
|                                                                                  |                                 |      |   |       |  |      |   |       |  |  |   |   |  |  |     |      
|Interest Rate Swaps (notional principal amount in
    $ millions) (maturity 2022) |                                 |      |  |       |  |      |  |       |  |  |  |   |  |  | 159 |      
|                                                                                  | Fair value (in $ millions)      |      |   |      |  |      |   |      |  |  |   |  |  |  |     | 8     | 
|                                                                                  |                                 |      |   |       |  |      |   |       |  |  |   |   |  |  |     |      



---



|    |                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | LME nickel purchase contracts were substantially
    offset by fixed price customer contracts with identical terms to
    more fully expose us to nickel price risk.

With respect to metals derivative instruments, in
2003 we increased our outstanding position in the derivatives
used to hedge a portion of our planned production of platinum
and we entered into hedges for a portion of our future
production of gold. No new positions were added for hedging of
our palladium production. With respect to derivative instruments
for currencies, we entered into Canadian dollar forward
contracts to hedge a portion of the Canadian dollar-denominated
capital costs for the initial phase of Voiseys Bay. No new
positions were engaged for the Euro and Australian dollars in
respect of the Goro project because of the suspension of this
project in late 2002 as discussed above. In 2003, our interest
rate swap in respect of our 9.60% Debentures due 2022 was
cancelled and this debt was redeemed. We entered into new swap
arrangements in 2003 to manage the entire amount of the interest
rate risk associated with our 5.70% Debentures due 2015 and
our 7.75% Notes due 2012.






| |                                             
| | --------------------------------------------
| | Off-Balance Sheet Financing
    Arrangements

In addition to the derivative instruments
referred to under Risks and Uncertainties above, the
off-balance sheet financing arrangements we currently have in
place involve accounts receivable securitized financing
arrangements in the United States and Japan with unrelated
entities under which up to approximately $92 million in
eligible receivables may be sold by us to these entities at any
time. Under these accounts receivable financing arrangements, a
significant deterioration in our credit rating and/or accounts
receivable being sold could give the purchaser of such
receivables the right not to renew the arrangements. We have
accounted for these securitizations as asset sales since their
inception but have recorded where relevant any loss retention
reserves with respect to the sale. As at December 31, 2003,
the aggregate amount of receivables sold was $17 million.
We do not currently believe that our liquidity would be
substantially reduced if these arrangements were not available
to us.






| |                                               
| | ----------------------------------------------
| | Critical Accounting Policies and
    Estimates

Preparing financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses.
Our estimates are based upon historical experience and on
various other assumptions that we believe to be reasonable under
the circumstances. The results of our ongoing evaluation of
these estimates form the basis for making judgments about the
carrying value of assets and liabilities and the reported
amounts for revenues and expenses. Actual results may differ
from these estimates. These estimates and assumptions are
affected by managements application of accounting
policies. Our critical accounting policies are those that affect
our 2003 consolidated financial statements materially and
involve a significant level of judgment by us. A summary of our
significant accounting policies, including critical accounting
policies, is set forth in note 1 to our 2003 consolidated
financial statements. Our critical accounting

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policies include inventories, property, plant and
equipment, depreciation and depletion, asset impairment, asset
retirement obligations, future employee benefits and income and
mining taxes.







| |            
| | -----------
| | Inventories

We have substantial investments in inventories of
finished metals and in-process stocks. The levels of finished
metals inventories are generally driven by customer requirements
and servicing commitments by our global marketing organization.
In-process inventory levels are generally a function of
operating requirements and include raw materials in transit.
Inventories are costed based on average costs to produce,
including all direct costs incurred through to the applicable
stage of production such as labour and materials, depreciation
and depletion, as well as an allocated portion of overheads.

The costing of metals produced at our Ontario
operations is primarily to establish values for metals in
inventory and cost of sales. Copper and nickel are treated as
co-products and share expenses pro rata based on pounds produced
unless a plant is specifically used for the upgrading of only
one metal or the other. Common costs (costs that are not
separately identifiable to one metal) incurred by nickel and
copper mined are apportioned between the metals on the basis of
tonnes of metal produced through the common mine and mill
processes. Once expenditures are required to further finish a
particular metal, all such expenditures are assigned to that
metal. The remaining metals (cobalt and precious metals) are
by-products and incur expenses only when some specific steps are
taken towards their recovery. Co-product costing for copper is
used because of the significant quantities of copper contained
in the ores at our Ontario operations.

We do not have significant quantities of
stockpiled ore on hand due to the integrated nature of our
operations. In addition, we do not use leach pads as a
processing method at any of our operations.






| |                              
| | -----------------------------
| | Property, Plant and Equipment

Canadian GAAP contains an apparent conflict in
the treatment of mineral rights with respect to balance sheet
classification. CICA 1581, Business Combinations, defines such
assets as intangible assets, while CICA 3061, Property, Plant
and Equipment, defines acquired mineral rights as property,
plant and equipment. We have interpreted the adoption of
CICA1581 and its companion statement, CICA 3062, Goodwill and
Other Intangible Assets, in a manner that has led us to conclude
that we are not required to change how we account for such
mineral rights under Canadian GAAP. In the United States,
SFAS No. 141, Business Combinations, which is
consistent with CICA 1581, requires that under United States
GAAP mineral rights are classified as intangible assets. This
matter has been referred to the Emerging Issues Task Force
(EITF) of the United States Financial Accounting
Standards Board for its consideration. There can be no certainty
as to the conclusions the EITF will reach, nor as to whether the
apparent conflict under Canadian GAAP will be resolved. For
Canadian GAAP, we have classified such assets, less the related
accumulated depreciation, depletion and amortization, as
Property, plant and equipment, net on our
consolidated balance sheet.

The only significant mineral rights that have a
carrying value on our balance sheet relate to the Voiseys
Bay deposits acquired in 1996. For United States GAAP purposes,
with respect to this acquisition, the carrying value has been
reclassified from property, plant and equipment to intangible
assets on the balance sheet and comprises a gross carrying value
balance of $2,471 million in 2003 and 2002. There is no
impact on the amortization of the portion of the intangible
asset value assigned to the estimated proven and probable ore
reserves until commencement of mine production currently
estimated to start in 2006.

With respect to the portion of the intangible
asset value assigned to the remainder of the deposit, the
difference between the carrying value and the residual value is
being amortized on a straight line basis over the period until
estimated proven and probable ore reserves are established and
underground development and mining are expected to commence.
This results in a pre-tax annual charge to net earnings of
$2 million under United States GAAP.

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| |                       
| | ----------------------
| | Exploration Properties

We use a multi-stage process to advance an
exploration property from initial exploration through to the
point of a development decision. The initial stage or
reconnaissance assessment includes a review of available
information, mapping, initial drilling and possibly down-hole
geophysical surveys. If no mineralization is intersected or
low-grade mineralization is intersected with limited potential,
the program is stopped. The second stage proceeds if
mineralization is discovered of sufficient width and grade to
indicate economic potential. When sufficient drilling has been
conducted, a geological model is constructed and the first
estimate of the potential tonnage and grade is made.
Scoping/conceptual studies for engineering/ financial
evaluations are also done. This allows an initial order of
magnitude evaluation to be completed. If this initial evaluation
is positive, further exploration work and infill drilling is
conducted to provide sufficient information to establish a
mineral resource estimate at the inferred classification. This
stage may take from one to three years depending on the depth of
the deposit. The third stage encompasses a preliminary
feasibility assessment. Based on the geological model and
geophysical information, certain areas are selected to carry out
detailed drilling to assess the short-range variability in the
geometry and grade of the mineralization. Bench scale milling
tests are also carried out as further infill drilling and a
detailed geological model is then constructed for the deposit.
Simulation models are also developed to assess mining method
alternatives and grade control methods. This process allows the
selection of the mining method and processing design. Estimation
of the mineral resources is performed and the development plan
is finalized. A preliminary feasibility study is then completed
along with financial evaluations and estimates of ore reserves.
This stage usually takes two to three years to complete. If the
preliminary feasibility study is positive, work would then
progress to the final stage where a final feasibility study is
prepared. This would involve detailed infill drilling of areas
where initial production would occur, metallurgical pilot plant
testing, geotechnical testing and modelling, construction of the
final geological model and block models, layout of work places,
detailed costing, financial evaluation and estimated ore
reserves. This final stage usually takes from one to two years.

The overall process can take from about four to
ten years. However, many factors impact the actual length of
time required. For example, open pit and laterite deposits near
existing facilities take the shortest time, with sulphide
deposits near existing facilities, generally in the mid-range
and new or greenfield projects, which require new
facilities are in the longer time range. In addition, the timing
of commencement of the work can be impacted by the need for ore
for production requirements.

Exploration properties that contain estimated
proven and probable ore reserves, but for which a development
decision has not yet been taken, are subject to periodic review
for impairment in accordance with our Companys accounting
policy when events or changes in circumstances indicate the
related carrying value may not be recoverable.






| |                           
| | --------------------------
| | Depreciation and depletion

Expenditures for new facilities or equipment and
expenditures that extend the useful lives of existing facilities
or equipment are capitalized and depreciated using the declining
balance or straight-line method at rates sufficient to
depreciate such costs over the estimated future lives of such
facilities or equipment. These lives do not exceed the estimated
operating mine life based upon estimated proven and probable ore
reserves unless we believe the asset can be utilized in another
facility after the mining operations have ended.

Costs relating to our operating mines include the
cost of building access ways, shaft sinking and access, lateral
development, drift development, ramps and infrastructure
development. All such costs are amortized using the
units-of-production method over the estimated life of the
orebody based on the anticipated production from our twenty-year
mine plan. A per tonne amortization rate is estimated based on
the net book value of the mine, anticipated capital costs to
access the relevant estimated proven and probable ore reserves
in our mine plan and estimated production from such estimated
proven and probable ore reserves in our mine plan. The amount of
estimated proven and probable ore reserves at our operating
mines is in excess of that currently anticipated to be produced
in our present mine plan.

The calculation of the units-of-production rate
of amortization and, accordingly, the annual amortization charge
to operations, could be materially affected to the extent that
actual production in the future is different

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from current forecasts of production based on
estimated proven and probable ore reserves and forecast future
capital expenditures. This would generally be the case where
there were significant changes in any of the factors or
assumptions used in estimating proven and probable ore reserves.
These factors could include (i) an expansion of estimated
proven and probable ore reserves through exploration activities,
(ii) differences between estimated and actual cash costs of
mining, due to differences in grade, metal recovery rates and
foreign currency exchange rates from those assumed, and
(iii) differences between actual commodity prices and the
commodity price assumptions used in the estimation of proven and
probable ore reserves. Such changes in reserves could similarly
impact the useful lives of assets depreciated on a straight-line
basis, where those lives are limited to the life of the mine.


The expected useful lives used in depreciation,
depletion and amortization calculations are determined based on
applicable facts and circumstances, as described in note 1
to our 2003 consolidated financial statements.

Significant judgment is involved in the
determination of useful lives and no assurance can be given that
actual useful lives will not differ significantly from the
useful lives assumed for purpose of depreciation, depletion and
amortization calculations.

For United States GAAP purposes, amortization of
the deferred mine development costs is calculated on a
unit-of-production basis over the estimated proven and probable
ore reserves which relate to the particular category of
development, either life of mine plan or area-specific. No
future development costs are taken into account in calculating
the amortization charge.

Life of mine plan development comprises capital
expenditures that will be utilized in the extraction of all the
estimated proven and probable ore reserves in the current
detailed mine plan. These expenditures are predominantly
incurred up front and in advance of any ore extraction or in
advance of major expansions. The types of development included
in this category include ore haulage shafts, initial decline,
ore passes, ventilation and chutes and underground ore crusher
cavities and are intended to be used for the extraction of all
ore within the current mine plan. These costs are amortized on a
unit-of-production basis over the total estimated proven and
probable ore reserves.

Area-specific development costs, which are
amortized over estimated proven and probable ore reserves for
which no further capital is required, consist of capital
expenditures to provide access to various areas within the mine
to allow the extraction of ore to commence. The types of
development costs that are within this category include: access
and perimeter drives, ventilation drives and rises, and
progressive declining subsequent to initial contact with the ore
body. These costs are amortized on a units-of-production basis
over the estimated proven and probable ore reserves that can be
currently accessed without future capital development costs
being incurred.

Ongoing mine development costs that provide
access to ore for less than two years production are
expensed as incurred.

For United States GAAP purposes, we have restated
PT Incos depreciation and depletion expense for the
amortization of deferred mine development costs and changed the
amortization of other assets from a unit-of-production to a
straight line method over the lesser of the assets useful
life up to 10 years in respect of mine and mobile
equipment; the lesser of the assets useful life and the
term of the current contract of work that expires in 2025 in
respect of roads, bridges and process plant buildings and
equipment; and, in the case hydroelectric facilities, the lesser
of the assets useful life up to 50 years.

For United States GAAP purposes we have restated
our depreciation and depletion expense for 2002 to conform to
United States GAAP described above. As a result of this change,
certain balance sheet accounts as of January 1, 2002 were
restated as follows: the deficit increased by $2 million;
property, plant and equipment increased by $4 million;
minority interest increased by $12 million; and deferred
income and mining taxes decreased by $6 million. The effect
of the change in methodology was a decrease to depreciation and
depletion expense of $38 million in 2003 (2002 
$13 million). The cumulative effect was a decrease to our
net earnings of $2 million, or 1 cent per share, in
2002, which is shown as a cumulative effect of a change in
accounting principle. For 2001, the impact would have been a
decrease in depreciation and depletion expense of
$9 million.

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Effective January 1, 2004, we will adopt for
Canadian GAAP purposes the depreciation and depletion method
described above for United States GAAP purposes. We are
evaluating what impact this change will have on our 2004
consolidated financial statements and whether we are able to
retroactively apply this change although applicable
pronouncements indicate that it is to be applied prospectively.
Had this method been applied beginning January 1, 2002, net
earnings for 2003 and 2002 would have increased by
$16 million and $5 million, respectively.






| |           
| | ----------
| | Impairment

We review and evaluate our long-lived assets for
impairment when events or changes in circumstances indicate the
related carrying amounts may not be recoverable. An asset
impairment is considered to exist if the total estimated future
cash flows on an undiscounted basis are less than the carrying
amount of the asset. An impairment loss is measured and recorded
based on discounted estimated future cash flows. Future cash
flows are estimated based on estimated quantities of recoverable
minerals, expected commodity prices (considering current and
historical prices, price trends and related factors), production
levels, cash costs of production, capital and reclamation costs,
all based on detailed life-of-mine plans. The term
recoverable minerals refers to the estimated amount
of nickel or other commodities that will be obtained from proven
and probable ore reserves and all related mineral interests,
after taking into account losses during ore processing and
treatment. Significant management judgment is involved in
estimating these factors, which include inherent risks and
uncertainties. The assumptions we use are consistent with our
internal planning. Management periodically evaluates and updates
the estimates based on the conditions that influence these
factors. The variability of these factors depends on a number of
conditions, including uncertainty about future events, and thus
our accounting estimates may change from period to period. If
other assumptions and estimates had been used in the current
period, the balances for noncurrent assets could have been
materially impacted. Furthermore, if management uses different
assumptions or if different conditions occur in future periods,
future operating results could be materially impacted.

In estimating future cash flows, assets are
grouped at the lowest levels for which there are identifiable
cash flows that are largely independent of future cash flows
from other asset groups, taking into consideration movements of
intermediate products to ensure the utilization of available
capacity across our operations. All assets at a particular
operation are considered together for purposes of estimating
future cash flows.

We periodically review our equity method
investments to determine whether a decline in fair value below
the carrying amount is other than temporary. In making this
determination, we consider a number of factors related to the
financial condition and prospects of the investee, including
(i) a decline in the valuation of the equity investee for
an extended period of time, (ii) an inability to recover
the carrying amount of the investment or inability of the equity
investee to sustain an earnings capacity which would justify the
carrying amount of the investment, and (iii) the period of
time over which we intend to hold the investment. If the decline
in fair value is deemed to be other than temporary, the carrying
value is written down to fair value. In situations where the
fair value of an investment is not evident due to a lack of a
public market price or other factors, we use our best estimates
and assumptions to arrive at the estimated fair value of such
investment, based on future cash flows of the equity investee
and other relevant factors. As significant judgment is required
in assessing these factors, it is possible that changes in any
of these factors in the future could result in an other than
temporary decline in value of an equity investment and could
require us to record an impairment charge to operations in
future periods.

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There were no impairment losses on long-lived
assets recorded in 2003. In 2002, the Company recorded an asset
impairment charge of $2,415 million as follows:

|                                           |  |              |       | 
|------------------------------------------ |  | ------------ | ----- | 
|                                           |  | ($ millions)
|                                           |  |             
|Voiseys Bay project                       |  | $            | 2,322 | 
|Victor Deep project (Ontario)              |  |              | 34    | 
|Write-off of accounts and notes receivable |  |              | 33    | 
|Write-down of production assets            |  |              | 17    | 
|Other                                      |  |              | 9     | 
|                                           |  |              |       | 
|Total                                      |  | $            | 2,415 | 
|                                           |  |              |       | 

The impairment loss with respect to the
Voiseys Bay project was determined using the following
assumptions:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) revenue assumptions for purposes of
    estimating future cash flows were based on the same commodity
    prices and exchange rates used to estimate proven and probable
    ore reserves at the end of 2001 as follows: nickel $3.20 per
    pound (LME cash nickel price); copper $1.00 per pound; cobalt
    $7.00 per pound (reduced from $10.00 per pound used for ore
    reserves at the end of 2001) and a long-term U.S. dollar/
    Canadian dollar exchange rate of $1.00 - $1.43;                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (b) the estimated production of nickel and
    copper concentrates were based on a concentrator operation
    capable of producing concentrate sufficient to refine on average
    110 million pounds of nickel per year. Initial processing
    of the nickel concentrate has been assumed to be done at the our
    Ontario and Manitoba operations for a period of years while
    hydrometallurgical processing facilities are developed and built
    in the Province of Newfoundland and Labrador. Thereafter
    processing has been assumed to occur at these new
    hydrometallurgical facilities;                                                                                                                                                                                                                                                                                                             
|
| | (c) these production levels were based on
    initial production from the currently established estimated
    proven and probable ore reserves followed by production from
    underground sources where it has been assumed that estimated
    proven and probable ore reserves would be established by the
    start of underground mining currently anticipated to occur in
    2017; estimates of the quantity of ore and its grade that may be
    contained in such underground sources, the cost of mining such
    ore and the capital cost of mine development are subject to
    considerable uncertainty; and                                                                                                                                                                                                                                                                                                 
|
| | (d) the cost of operations were developed
    based on the definitive agreements entered into by us with the
    Province of Newfoundland and Labrador that established the
    project scope, tax regime applicable to the project and the size
    and nature of the production facilities, among other things.
    Operating costs for mining and processing operations were
    developed based on our experience in mining and processing
    similar ores at our Ontario and Manitoba operations. Where
    production processes called for the use of new technology, cost
    estimates were developed by our technical personnel involved in
    the development of the process technologies. Estimated costs
    associated with the impacts and benefits agreements entered into
    between us and two Aboriginal groups were also taken into
    consideration in developing the overall cost of operations.

The estimated proven and probable ore reserves
for the Voiseys Bay project were based on a feasibility
study prepared in 1996 and have been supported by additional
exploration work and evaluations since that time. Subsequent to
the impairment evaluation, we completed a bankable feasibility
study for the initial phase of the Voiseys Bay project
that includes construction of an open pit mine and concentrator,
a port and related infrastructure development. Construction of
the initial phase of our Voiseys Bay project is well
underway as described above.






| |                             
| | ----------------------------
| | Asset Retirement Obligations

Our mining operations involve activities that
have a significant effect on the area surrounding such
operations. We estimated our ultimate reclamation and closure
costs (including those that we expect to incur during
operations) would total $904 million. Effective
January 1, 2003, we adopted CICA 3110, Accounting for

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Asset Retirement Obligations. CICA 3110 requires
that we record the fair value of our estimated asset retirement
obligations when a legal obligation is incurred. These
liabilities are accreted to full value over time through charges
to income.


The accounting estimates related to reclamation
and closure costs are critical accounting estimates because
(i) we will not incur most of these costs for a number of
years, requiring us to make estimates over a relatively long
period; (ii) reclamation and closure laws and regulations
could change in the future or circumstances affecting our
operations could change, either of which could result in
significant changes to our current plans and future costs;
(iii) calculating the fair value of our asset retirement
obligations requires management to assign probabilities to
projected cash flows, to make long-term assumptions about
inflation rates, to determine our long-term credit-adjusted,
risk-free interest rates and to determine market risk premiums
that are appropriate for our operations over long periods of
time; and (iv) given the magnitude of our estimated
reclamation and closure costs, changes in any or all of these
estimates could have a material impact on our profitability
and/or our financial condition.

To calculate the fair value of these obligations,
we discounted the projected cash flows at our estimated
credit-adjusted, risk-free interest rates which ranged from two
per cent to eight per cent for the corresponding time periods
over which these costs would be incurred. The inflation rates
and discount rates we used to calculate the fair value of our
asset retirement obligations are critical factors in the
calculation of future value and discounted present value costs.
We estimated the cash flows for asset retirement obligations
assuming the most likely set of outcomes. In general, given the
nature of our business and specificity of our assets, there are
very restrictive ways in which to retire our assets and conform
to the applicable environmental regulations including closure
and related requirements. Therefore, in such instances, a range
of likely outcomes was not used because multiple approaches to
retire our assets were not appropriate. We applied a market risk
premium to the total obligations to reflect what a third party
might demand to assume our asset retirement obligations. The
market risk premium was based on market-based estimates of rates
that a third party would have to pay to insure its exposure to
possible future increases in the value of these obligations.
Significant and difficult judgements by management are required
in arriving at these estimates and, as noted above, changes in
the estimates could have a material impact on our profitability.

In addition, there are certain environmental
issues pertaining to former industrial sites that were retained
by us relating to former businesses that had been sold by us. In
determining whether a liability exists in respect of these
environmental issues, we apply the criteria for liability
recognition set forth in applicable accounting standards. We
regularly review the status of environmental issues to determine
whether a liability should be established or an additional
liability recognized with the corresponding charge to our
earnings.






| |                                       
| | --------------------------------------
| | Future Employee Benefits and
    Costs

Pension expense is determined separately for each
of our pension plans and other post-retirement arrangements
based on the principles outlined in both Canadian and United
States accounting standards. Assets are valued using a
market-related value, determined based on the current market
value and the market values in the previous four years (that is,
with an averaging of experience gains and losses over the five
year period). The expected return on assets assumption is based
on current bond yields, an expected equity risk premium and an
allowance for expected value added as a result of active
management, where applicable. For 2004, the long-term rate of
return on assets assumption has been reduced from 8.5 per
cent to 8.0 per cent. This long-term rate of return on
assets assumption is reviewed on an annual basis.

Liabilities are determined as a present value of
future anticipated cash flows using a discount rate based on
corporate AA bond yields at the valuation date and an inflation
expectation consistent with the corporate AA bond yield curve.
Differences between the estimated future results and actual
future results are amortized (to the extent that the cumulative
experience gain or loss is in excess of the permitted
10 per cent corridor under Canadian GAAP) over the expected
average remaining service life of the active members (EARSL).
This 10 per cent corridor, as defined by Canadian GAAP,
represents 10 per cent of the greater of the post-retirement
benefits obligations and the fair value of plan assets. The
return on assets assumption and the discount rate, salary and
inflation assumptions used to value the liabilities are reviewed
annually and are determined based on a consistent

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framework from year-to-year. The most significant
risk is that the assumptions will prove to be either too high or
too low in the long term. It is reasonable to assume that there
will be a significant variation between the assumptions (which
are set within the framework of a long-term commitment) and
actual experience in any one year. Over the long-term,
cumulative pension expense is expected to produce an appropriate
reflection of the costs associated with the pension program.


The expense for other post-retirement benefits or
non-pension benefits is based on a similar methodology and
similar determination of the liability value. The discount rate
used is the same as that determined for the pension obligations.
The inflation rate assumed for medical costs is based on our
history of healthcare spending. The assumption for the ultimate
health care trend rates relates to the overall economic trends.
With this reasoning, the ultimate trend rate is comprised of the
assumed inflation rate, real gross domestic product growth of
1.5 per cent to 2 per cent and health care expenditure
growth rate at a slightly higher rate over the long term.

We currently estimate that a 0.5 per cent
increase or decrease in the return on assets assumption would
result in a corresponding $10 million decrease or increase,
in annual pension expense. Changes to the return on assets
assumption would have no significant effect on funding
requirements, as our contributions are primarily determined
based on the applicable Canadian regulatory solvency funding
requirements (that is, the windup valuation). Under this
valuation methodology, liabilities for solvency valuation are
based on market bond yields and the excess of liabilities over
assets must be amortized over a five-year period. We estimate
that a 0.5 per cent increase or decrease in the discount
rate assumption would result in a corresponding $5 million
decrease or increase in annual pension expense. As we are
currently contributing substantially more than the minimum
requirements under certain applicable pension standards
legislation and we currently plan to continue to do so over at
least the next few years, long-term bond yields would need to
decline by more than one per cent from current levels to require
any increase in contributions.






| |                        
| | -----------------------
| | Income and mining taxes

The provision or relief for income and mining
taxes is calculated based on the expected tax treatment of
transactions recorded in our 2003 consolidated financial
statements. The objectives of accounting for income and mining
taxes are to recognize the amount of taxes payable or refundable
for the current year and deferred tax liabilities and assets for
the future tax consequences of events that have been recognized
in our 2003 consolidated financial statements or tax returns. In
determining both the current and future components of income and
mining taxes, we interpret tax legislation in a variety of
jurisdictions as well as make assumptions about the expected
timing of the reversal of future tax assets and liabilities. If
our interpretations differ from those of tax authorities or if
the timing of reversals is not as anticipated, the provision or
relief for income and mining taxes could increase or decrease in
future periods. In estimating deferred income and mining tax
assets, a valuation allowance is determined to reduce the future
income tax assets to the amount that is more likely than not to
be realized. This valuation allowance for 2003 amounted to
$27 million, comprising (i) $3 million in respect
of non-capital losses available to Goro Nickel S.A.,
(ii) $12 million in respect of net capital losses
available in the United States and United Kingdom, and
(iii) $12 million in respect of unrealized capital
losses arising from the write-down of certain investments and
other assets. In 2002, the valuation allowance was $57 million,
comprised of (i) $2 million in respect of non-capital
losses for Goro Nickel S.A., (ii) $20 million in
respect of net capital losses in the United States and United
Kingdom, (iii) $12 million in respect of unrealized
capital losses arising from the write-down of certain
investments and other assets, and (iv) $23 million in
respect of accrued unrealized foreign exchange losses on foreign
currency denominated long-term debt. In 2001, the valuation
allowance amounted to $48 million, representing
(i) $25 million in respect of net capital losses
available in Canada, the United States and United Kingdom, and
(ii) $23 million in respect of capital losses for
accrued unrealized foreign exchange losses on foreign currency
denominated long-term debt. These valuation allowances have been
provided for as it is more likely than not that these
non-capital and net capital losses will be realized for tax
purposes in the future. In each year, the amount of the
valuation allowance reduces the future income tax assets and
effectively increases the amount of the net deferred income tax
liabilities and, accordingly, the provision for income and
mining taxes on the earnings statement. Additional information
regarding our accounting for income and mining taxes is
contained in note 7 to our 2003 consolidated financial
statements.

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Accounting Changes





| |     
| | ----
| | 2001

Effective January 1, 2001, we adopted,
retroactively as a change in accounting policy, a new accounting
standard of the CICA in respect of earnings per share. This new
standard, which is consistent with United States GAAP, changed
the method in which diluted earnings per share are calculated.
The effect of this change is described in note 2 to our
2003 consolidated financial statements.

Also effective January 1, 2001, we adopted,
retroactively as a change in accounting policy, a new accounting
standard of the CICA in respect of stock-based compensation and
other stock-based payments. This new standard, which
substantially conforms to United States GAAP, requires either
the recognition of a compensation expense for grants of stock,
stock options and other equity instruments to employees or,
alternatively, the disclosure of pro forma net earnings and
earnings per share data as if stock-based compensation had been
recognized in earnings. The effect of this change is described
in note 2 to our 2003 consolidated financial statements.

Also effective January 1, 2001, we adopted,
retroactively, a new accounting standard of the CICA in respect
of interim financial statements. As a consequence, we changed
our accounting policy, for interim reporting purposes only, in
connection with the timing of recognizing the costs associated
with the planned annual shutdown of operations for maintenance.
Previously, these costs were expensed evenly over the year
whereas under the new standard such costs are expensed in the
period in which they are incurred. The effect of this change is
described in note 2 to our 2003 consolidated financial
statements.

We also adopted, for United States reporting
purposes, certain United States standards relating to accounting
for derivative instruments and hedging activities effective
January 1, 2001. The effect of adopting these standards is
described in note 23 to the consolidated financial
statements.






| |     
| | ----
| | 2002

Effective January 1, 2002, we adopted a new
standard of the CICA in respect of foreign currency translation,
which conforms substantially to United States GAAP, that
eliminates the deferral and amortization of currency translation
adjustments related to long-term monetary items with a fixed and
ascertainable life. The effect of adopting this standard is
described in note 2 to our 2003 consolidated financial
statements.

Effective January 1, 2002, we adopted new
standards of the CICA in respect of business combinations and
goodwill for Canadian reporting purposes. These standards
conform substantially to new United States standards, which we
also adopted for United States reporting purposes commencing in
the first quarter of 2002. Also effective January 1, 2002,
we adopted a new United States standard in respect of accounting
for the impairment or disposal of long-lived assets for United
States reporting purposes. The adoption of these standards had
no significant impact on our results of operations or financial
condition.

Effective July 1, 2002, we adopted, for
United States reporting purposes, a new standard that amended
existing authoritative pronouncements relating to the accounting
for the extinguishment of debt. The adoption of the new standard
did not have a significant impact on our results of operations
or financial condition.

Effective December 31, 2002, we adopted, for
United States reporting purposes, a new interpretation that
clarifies the requirements for disclosure of certain types of
guarantees. The interpretation also requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the
fair value of the obligation it assumes under the guarantee. The
adoption of this interpretation did not have a significant
impact on our results of operations or financial condition.

Effective December 31, 2002, we adopted, for
United States reporting purposes, a new interpretation that
addresses the consolidation of variable interest entities and
provides guidance with respect to the disclosure of such
entities. There was no significant impact on our results of
operations or financial condition as a result of the adoption of
this interpretation.

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| |     
| | ----
| | 2003

Effective January 1, 2003, we adopted, for
United States reporting purposes commencing in the first quarter
of 2003, a new standard relating to the accounting for costs
associated with the exit from or disposal of a business. This
standard requires that a liability for a cost associated with an
exit or disposal activity shall be recognized and measured
initially at its fair value in the period in which the liability
is incurred provided that such fair value can be reasonably
estimated. An exception applies for certain one-time termination
benefits that are incurred over time. The adoption of the new
standard did not have a significant impact on our results of
operations or financial condition.

In addition, effective January 1, 2003, for
Canadian and United States reporting purposes we adopted new
standards in respect of accounting for asset retirement
obligations. These standards, which are substantially identical,
require that a liability for retirement obligations be
recognized when incurred and recorded at fair value. The effect
of adopting these standards is described in note 2 and
note 23 to our 2003 consolidated financial statements.

Effective January 1, 2003, for Canadian and
United States reporting purposes, we changed the accounting for
stock-based compensation from the intrinsic value method to one
that recognizes in earnings the cost of stock-based compensation
based on the estimated fair value of new stock options granted
to employees in 2003 and in future years. The effect of this
change in accounting policy is described in note 2 and
note 23 to our 2003 consolidated financial statements.

Effective January 1, 2003, we adopted a new
accounting standard of the CICA in respect of the impairment or
disposal of long-lived assets, which substantially conforms to
United States GAAP. The adoption of the new standard did not
have a significant impact on our results of operations or
financial condition.






| |     
| | ----
| | 2004

We will be adopting new accounting guidelines
issued by the CICA in respect of hedging relationships for
Canadian reporting purposes. The new guidelines will be applied
commencing with hedging relationships outstanding on
January 1, 2004. We do not anticipate that the new
guidelines will have a material effect on our results of
operations and financial condition.

Effective January 1, 2004, we will adopt
CICA 1100, Generally Accepted Accounting Principles.
CICA 1100 describes what constitutes Canadian GAAP and its
sources. We are currently evaluating how this standard will be
implemented and what impact the adoption of this new standard
will have on our consolidated financial statements.




Outlook

We continue to pursue our goal of being the
worlds most profitable nickel producer through our
three-part strategy of maintaining strong low-cost operations
focused on high-margin production, pursuing profitable growth
and enhancing our strong global marketing position, including
the development and sale of value-added products.

Our two major development projects, Goro and
Voiseys Bay, are currently expected to have a significant
effect on our future results of operations, financial condition,
profitability and cash flows.






| |           
| | ----------
| | Operations

At our Manitoba operations, we expect to continue
to see lower ore grades in 2004. However, we expect marginally
higher production in Manitoba in 2004 due to increased
production from this operations Birchtree mine and certain
concentrator modifications, which will partially offset the
lower grades, and despite a planned rebuild of one of this
operations two furnaces which will result in a single
furnace operation for approximately seven weeks during the year.

At our Ontario operations, we plan to extend
intervals between maintenance shutdowns to 18 months from
12 months and as a result our planned production for 2004
is scheduled to increase. This change is expected to raise
production in 2004. We also plan to increase purchased
intermediates processed at Ontario in 2004 and

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shutdown sections of the processing facilities
for shorter maintenance intervals rather than stopping
production for the normal one-month maintenance shutdown. In
addition, our current plan for 2004 is to run this
operations smelter at 5,000 tons per day of furnace
feed, above its design capacity. We produce virtually all of our
own platinum-group metals from Ontario ores and currently expect
production of 400,000 troy ounces in 2004. We are currently
developing one orebody, the 170 orebody at Coleman and the
Creighton Deep area, to meet our future platinum-group metals
production targets as we plan to maintain platinum-group metals
production at the 400,000 troy ounces level beyond 2004.


At PT Inco, we plan to enhance mining methods in
2004 to minimize dilution while optimizing ore grades and
blending to mitigate ore chemistry-related delays in the process
plant. In order to keep pace with rising production volumes, we
are increasing drilling and mine development at PT Inco. This
will include mining material from our new mining area of Petea
where ore chemistry is amenable to blending with our other
Sorowako area ores as high quality feed for PT Incos
process plant. Initial production from Petea is expected to
begin at the end of 2004. At PT Inco, the lack of sufficient
low-cost power to maximize production remains a bottleneck in
its operations. Energy accounted for about 36 per cent of PT
Incos total production costs in 2003. We plan to increase
production by using more costly fuel-fired generators. We also
plan to increase wet ore stockpiling, allowing ore to dry out
and drain better since every one per cent reduction in water
content saves about seven per cent of the fuel used for PT
Incos dryers or approximately $2 million in costs per
year. In addition, we are working to combine PT Incos
thermal and hydroelectric systems by late 2004 to generate about
10 megawatts of power more than each system can produce alone.
We are currently evaluating whether to build a third dam for PT
Inco to raise its hydroelectric capacity by approximately 90
megawatts to approximately 360 megawatts. Such an additional dam
could enable PT Inco to produce up to 200 million pounds of
nickel-in-matte annually and lower its costs of production by up
to about $0.10 to $0.15 per pound.

In Ontario, we are taking various measures to
control costs, including manpower reductions. We reduced our
Sudbury workforce by some 160 people in 2003 and currently
expect to reduce this workforce by more than 100 people in 2004.
In addition, we are targeting lower use and cost of supplies and
services through global procurement practices like electronic
auctions and volume leverage.

Our corporate-wide objective is to cut
controllable costs across our operations by 10 to 15 per cent
over the next 12 to 15 months by developing and putting in
place new productivity programs and taking other actions to
improve the competitiveness of our operations. We are currently
targeting $63 million in cost reductions in 2004.






| |                                                     
| | ----------------------------------------------------
| | 2004 Planned Capital Expenditures and
    Production

Our 2004 capital expenditures are currently
expected to total $1,040 million, including, as discussed above,
approximately $430 million for the initial phase of the
Voiseys Bay project, approximately $220 million for
the Goro project assuming a decision to proceed on this project
is made in the summer of 2004 and approximately
$390 million in sustaining capital expenditures for
existing operations, of which about $60 million will be
required for environmental measures and about $135 million
for existing operations to maximize nickel production, primarily
at PT Inco.

Our 2004 nickel production is currently expected
to be in the range of 227,000 to 231,000 tonnes, up
substantially from the 187,173 tonne level in 2003. Our 2003
nickel production was negatively impacted by the strike at our
Ontario operations. We expect our purchases of nickel
intermediates to increase by over 45 per cent from 2003 levels
to approximately 33,570 tonnes in 2004. This external feed
source is expected to represent the source of 15 per cent of
planned 2004 finished nickel production, up from 23,130 tonnes
in 2003 as discussed above. We use purchased intermediates to
increase the processing capacity utilization of our Ontario and
Manitoba operations, as discussed under Risks and
Uncertainties  Other Risks and Uncertainties
above, and to maintain nickel production at the Manitoba
operations at or near its 45,000 tonne annual capacity. While
such use is profitable, it does increase our costs, particularly
at higher nickel prices since the cost of purchased
intermediates is based on prevailing LME prices. Copper
production is currently expected to be approximately 118,000
tonnes in 2004, up 29 per cent from 91,134 tonnes in 2003. Total
production of platinum-group metals is expected to increase to
400,000 troy ounces in 2004 from the 2003 strike-affected level
of 207,000 troy ounces.

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| |                         
| | ------------------------
| | Nickel Market Conditions

Stainless steel demand has grown by almost six
per cent annually for more than 50 years, including the
past decade, and we have seen no signs that such growth will be
slowing down during at least the next few years. The stainless
steel industry, the principal end-use market for nickel, has
been making significant investments to increase production
capacity in an attempt to meet continued demand growth. Demand
for stainless steel is currently expected to remain strong over
at least the next few years based upon the expected resumption
of strong growth in world demand, in particular continued strong
demand growth in China. The combination of Chinas
stainless steel demand growth and nickel demand growth in 2003
accounted for more than two-thirds of the overall increase in
world nickel demand for 2003.

With most nickel producers operating at or near
capacity in 2004 and taking into account that there currently
exists limited shutdown capacity available to be restarted and
with the latest round of expansions to existing production
capacity coming to an end, we currently estimate that there will
be an insufficient amount of additional nickel supply prior to
2006 to meet the expected growth in demand.

Nickel demand in 2004 is currently anticipated to
be relatively strong for several reasons. First, more than three
million tonnes of stainless steel capacity was commissioned in
2002 and 2003, with about 1.5 million tonnes of additional
production from this new capacity in 2003. These large
expansions, in addition to several new projects, are expected to
result in higher production of stainless steel in 2004. Second,
Chinese nickel demand has continued to grow during the last
three years, even when Western World economic growth was
essentially flat or declining. For 2004, the projected demand
strength in China is expected to be complemented by the emerging
economic recovery in the United States and other Western World
regions. Third, reported nickel inventories, both producer and
LME, are at very low levels relative to prior nickel cycles.
These inventory levels at December 31, 2003 represented
approximately 4.3 weeks of demand, which is considered very
low. Fourth, the availability of nickel-containing stainless
steel scrap, as an alternative source of nickel for the
stainless steel industry, is not expected to keep pace with
demand growth in 2004, due to low levels of such scrap from
Russia, continued growth in consumption of such scrap by Chinese
mini-mills, and the projected increase in stainless steel
production.




Non-GAAP Financial Measure

We have referred to nickel unit cash cost of
sales before and after by-product credits because we understand
that certain investors use this information to assess our
performance and also determine our ability to generate cash flow
for use in investing activities. The inclusion of these two unit
cost measurements, nickel unit cash cost of sales before and
after by-product credits, enables investors to better understand
our year-to-year changes in production costs using metrics that
reflect our key ongoing cash production costs which, in turn,
affect our profitability and cash flows. These measurements
capture all of the important components of our production and
related costs. The reason for providing the nickel unit cash
cost of sales on the basis of before as well as after by-product
credits is to allow investors to see the impact on these metrics
of changes in copper, cobalt and precious metals contributions
which have historically largely been driven by the prices for
these metals. In addition, as discussed above, management
utilizes these metrics as an important management tool to
monitor cost performance of each of our key operations relative
to planned and prior period results. These measurements are
intended to provide additional information and should not be
considered in isolation or as a substitute for measures of
performance prepared in accordance with Canadian GAAP.

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The following table provides for the periods
indicated a reconciliation between nickel unit cash cost of
sales before and after by-product credits, two key measurements
we use to monitor our cost performance, and Canadian GAAP cost
of sales:






| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | Reconciliation of Nickel Unit Cash Cost of
    Sales Before and After By-Product Credits to Canadian GAAP Cost
    of Sales

|                                                                                     |  |                             |       |               |  |               |       |   |  |   |       |  
|------------------------------------------------------------------------------------ |  | --------------------------- | ----- | ------------- |  | ------------- | ----- | - |  | - | ----- | -
|                                                                                     |  | 2003                        |       | 2002          |  | 2001         
|                                                                                     |  |                             |       |               |  |              
|                                                                                     |  |                             |       | (restated)(3) |  | (restated)(3)
|                                                                                     |  |                            
|                                                                                     |  | ($ in millions except pound
|                                                                                     |  | and per pound data)        
|Cost of sales and other operating expenses,
    excluding depreciation and depletion |  | $                           | 1,735 |               |  | $             | 1,378 |   |  | $ | 1,416 |  
|By-product costs                                                                     |  |                             | (383  | )             |  |               | (415  | ) |  |   | (453  | )
|Purchased finished nickel                                                            |  |                             | (279  | )             |  |               | (130  | ) |  |   | (149  | )
|Delivery expense                                                                     |  |                             | (25   | )             |  |               | (24   | ) |  |   | (27   | )
|Other businesses cost of sales                                                       |  |                             | (25   | )             |  |               | (22   | ) |  |   | (21   | )
|Strike expense, excluding depreciation                                               |  |                             | (88   | )             |  |               |      |   |  |   |      |  
|Non-cash items(1)                                                                    |  |                             | (24   | )             |  |               | (17   | ) |  |   | (19   | )
|Remediation, demolition and other related expenses                                   |  |                             | (55   | )             |  |               | (23   | ) |  |   | (23   | )
|Other                                                                                |  |                             | (36   | )             |  |               | (7    | ) |  |   | (12   | )
|                                                                                     |  |                             |       |               |  |               |       |   |  |   |       |  
|Nickel cash cost of sales before by-product
    credits(2)                           |  |                             | 820   |               |  |               | 740   |   |  |   | 712   |  
|By-product net sales                                                                 |  |                             | (330  | )             |  |               | (476  | ) |  |   | (549  | )
|By-product costs                                                                     |  |                             | 383   |               |  |               | 415   |   |  |   | 453   |  
|                                                                                     |  |                             |       |               |  |               |       |   |  |   |       |  
|Nickel cash cost of sales after by-product
    credits(2)                            |  | $                           | 873   |               |  | $             | 679   |   |  | $ | 616   |  
|                                                                                     |  |                             |       |               |  |               |       |   |  |   |       |  
|Inco-source nickel deliveries (millions of pounds)                                   |  |                             | 406   |               |  |               | 468   |   |  |   | 457   |  
|                                                                                     |  |                             |       |               |  |               |       |   |  |   |       |  
|Nickel unit cash cost of sales before
    by-product
    credits per pound           |  | $                           | 2.02  |               |  | $             | 1.58  |   |  | $ | 1.56  |  
|                                                                                     |  |                             |       |               |  |               |       |   |  |   |       |  
|Nickel unit cash cost of sales after
    by-product
    credits per pound            |  | $                           | 2.15  |               |  | $             | 1.45  |   |  | $ | 1.35  |  
|                                                                                     |  |                             |       |               |  |               |       |   |  |   |       |  



---



|    |                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------
|(1) | Post-retirement benefits other than pensions.                                                                                            
|(2) | Nickel cash cost of sales before and after
    by-product credits includes costs for our Inco ore source and
    purchased intermediates.
|(3) | Restated for the adoption of new accounting
    standards for asset retirement obligations.                                              




Other Information

Reference is made to Markets for Inco
Limiteds Common Shares, Related Shareholder Matters and
Inco Limiteds Issuances or Purchases of Equity
Shares  Other Information above for certain
information on governmental and other policies and factors
affecting our operations and investments by non-Canadians in our
securities. Reference is also made to Quarterly Financial
Information below for our quarterly net sales, net
earnings and earnings per share data for 2003 and 2002.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

The information under Risks and
Uncertainties and Sensitivities in
Managements Discussion and Analysis of Financial
Condition and Results of Operation set forth as Item 7
of this Report is incorporated herein by reference to such
information.

146



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##### Table of Contents








|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

AUDITORS REPORTS

To the Shareholders of Inco Limited:

We have audited the consolidated balance sheet of
Inco Limited as at December 31, 2003, 2002 and 2001 and the
consolidated statements of earnings, retained earnings
(deficit) and cash flows for the years then ended. In
addition, we have audited Schedule VIII 
Valuation Accounts and Reserves under Item 8 of this
Report. These consolidated financial statements and the
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and the
financial statement schedule based on our audits.

We conducted our audits in accordance with
Canadian and United States generally accepted auditing
standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation.

In our opinion, these consolidated financial
statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2003,
2002 and 2001 and the results of its operations and its cash
flows for the years then ended in accordance with Canadian
generally accepted accounting principles. In addition, in our
opinion, Schedule VIII  Valuation Accounts and
Reserves presents fairly, in all material respects, the
financial information set forth therein when read in conjunction
with the related consolidated financial statements.

PRICEWATERHOUSECOOPERS LLP

Chartered Accountants


Toronto, Ontario


February 3, 2004

Comments by Auditors for United States Readers
on Canada  United States Reporting
Differences

As described in note 23(p), the
reconciliation to United States generally accepted accounting
principles as at December 31, 2002 and 2001 and for each
year in the two year period ended December 31, 2002 have
been restated.

PRICEWATERHOUSECOOPERS LLP

Chartered Accountants


Toronto, Ontario


March 12, 2004

147



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CONSOLIDATED STATEMENT OF EARNINGS

|                                                                                              |         |                                       |       |            |  |            |        |       |   |   |       |      | 
|--------------------------------------------------------------------------------------------- | ------- | ------------------------------------- | ----- | ---------- |  | ---------- | ------ | ----- | - | - | ----- | ---- | 
|                                                                                              |         |                                      
|                                                                                              |         | Year ended December 31               
|                                                                                              |         |                                      
|                                                                                              |         | 2003                                  |       | 2002       |  | 2001      
|                                                                                              |         |                                       |       |            |  |           
|                                                                                              |         |                                       |       | (Restated) |  | (Restated)
|                                                                                              |         |                                      
|                                                                                              |         | (in millions of United States dollars
|                                                                                              |         | except per share amounts)            
|Revenues                                                                                      |         |                                       |       |            |  |            |        |       |   |   |       |     
|Net sales (Note 19)                                                                           |         | $                                     | 2,474 |            |  | $          | 2,161  |       |   | $ | 2,066 |     
|Other income, net (Note 6)                                                                    |         |                                       | 104   |            |  |            | 40     |       |   |   | 13    |     
|                                                                                              |         |                                       |       |            |  |            |        |       |   |   |       |     
|                                                                                              |         |                                       | 2,578 |            |  |            | 2,201  |       |   |   | 2,079 |     
|                                                                                              |         |                                       |       |            |  |            |        |       |   |   |       |     
|Costs and operating expenses
    (income)                                                     |         |                                       |       |            |  |            |        |       |   |   |       |     
|Cost of sales and other operating expenses,
    excluding depreciation and depletion (Note 3) |         |                                       | 1,735 |            |  |            | 1,378  |       |   |   | 1,416 |     
|Depreciation and depletion (Note 3)                                                           |         |                                       | 265   |            |  |            | 255    |       |   |   | 263   |     
|Selling, general and administrative                                                           |         |                                       | 169   |            |  |            | 136    |       |   |   | 111   |     
|Research and development                                                                      |         |                                       | 27    |            |  |            | 17     |       |   |   | 20    |     
|Exploration                                                                                   |         |                                       | 27    |            |  |            | 24     |       |   |   | 23    |     
|Currency translation adjustments                                                              |         |                                       | 177   |            |  |            | 5      |       |   |   | (39   | )   
|Interest expense                                                                              |         |                                       | 44    |            |  |            | 50     |       |   |   | 56    |     
|Asset impairment charges (Note 4)                                                             |         |                                       |      |            |  |            | 2,415  |       |   |   |      |     
|Goro project suspension costs (Note 5)                                                        |         |                                       | (4    | )          |  |            | 25     |       |   |   |      |     
|                                                                                              |         |                                       |       |            |  |            |        |       |   |   |       |     
|                                                                                              |         |                                       | 2,440 |            |  |            | 4,305  |       |   |   | 1,850 |     
|                                                                                              |         |                                       |       |            |  |            |        |       |   |   |       |     
|Earnings (loss) before income and mining
    taxes and minority interest                      |         |                                       | 138   |            |  |            | (2,104 | )     |   |   | 229   |     
|Income and mining taxes (Note 7)                                                              |         |                                       | (49   | )          |  |            | (639   | )     |   |   | (85   | )   
|                                                                                              |         |                                       |       |            |  |            |        |       |   |   |       |     
|Earnings (loss) before minority interest                                                      |         |                                       | 187   |            |  |            | (1,465 | )     |   |   | 314   |     
|Minority interest                                                                             |         |                                       | 50    |            |  |            | 17     |       |   |   | 10    |     
|                                                                                              |         |                                       |       |            |  |            |        |       |   |   |       |     
|Net earnings (loss)                                                                           |         |                                       | 137   |            |  |            | (1,482 | )     |   |   | 304   |     
|Dividends on preferred shares (Note 15)                                                       |         |                                       | (6    | )          |  |            | (26    | )     |   |   | (26   | )   
|Accretion of convertible debt (Note 14)                                                       |         |                                       | (7    | )          |  |            | (4     | )     |   |   | (3    | )   
|Premium on redemption of preferred shares
    (Note 15)                                       |         |                                       | (15   | )          |  |            |       |       |   |   |      |     
|                                                                                              |         |                                       |       |            |  |            |        |       |   |   |       |     
|Net earnings (loss) applicable to common
    shares                                           |         | $                                     | 109   |            |  | $          | (1,512 | )     |   | $ | 275   |     
|                                                                                              |         |                                       |       |            |  |            |        |       |   |   |       |     
|Net earnings (loss) per common share
    (Note 8)                                             |         |                                       |       |            |  |            |        |       |   |   |       |     
|                                                                                              | Basic   |                                       | $     | 0.59       |  |            | $      | (8.27 | ) |   | $     | 1.51 | 
|                                                                                              | Diluted |                                       | $     | 0.58       |  |            | $      | (8.27 | ) |   | $     | 1.49 | 
|                                                                                              |         |                                       |       |            |  |            |        |       |   |   |       |     

CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(DEFICIT)

|                                                                             |  |                                        |      |            |  |            |        |   |  |   |       |  
|---------------------------------------------------------------------------- |  | -------------------------------------- | ---- | ---------- |  | ---------- | ------ | - |  | - | ----- | -
|                                                                             |  |                                       
|                                                                             |  | Year ended December 31                
|                                                                             |  |                                       
|                                                                             |  | 2003                                   |      | 2002       |  | 2001      
|                                                                             |  |                                        |      |            |  |           
|                                                                             |  |                                        |      | (Restated) |  | (Restated)
|                                                                             |  |                                       
|                                                                             |  | (in millions of United States dollars)
|Retained earnings (deficit) at beginning of
    year, as previously reported |  | $                                      | (335 | )          |  | $          | 1,194  |   |  | $ | 918   |  
|Change in accounting policy (Note 2)                                         |  |                                        |     |            |  |            | (17    | ) |  |   | (16   | )
|                                                                             |  |                                        |      |            |  |            |        |   |  |   |       |  
|Retained earnings (deficit) at beginning of
    year, as restated            |  |                                        | (335 | )          |  |            | 1,177  |   |  |   | 902   |  
|Net earnings (loss)                                                          |  |                                        | 137  |            |  |            | (1,482 | ) |  |   | 304   |  
|Dividends on preferred shares                                                |  |                                        | (6   | )          |  |            | (26    | ) |  |   | (26   | )
|Accretion of convertible debt                                                |  |                                        | (7   | )          |  |            | (4     | ) |  |   | (3    | )
|Premium on redemption of preferred shares
    (Note 15)                      |  |                                        | (15  | )          |  |            |       |   |  |   |      |  
|                                                                             |  |                                        |      |            |  |            |        |   |  |   |       |  
|Retained earnings (deficit) at end of year                                   |  | $                                      | (226 | )          |  | $          | (335   | ) |  | $ | 1,177 |  
|                                                                             |  |                                        |      |            |  |            |        |   |  |   |       |  

The Notes to Consolidated Financial Statements
below are an integral part of these statements.

148



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##### Table of Contents



CONSOLIDATED BALANCE SHEET

|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |       | 
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ----- | ---------- | - | ---------- | ----- | ----- | - | - | ----- | ----- | 
|                                                         |                                                                                                                         |                                       
|                                                         |                                                                                                                         | December 31                           
|                                                         |                                                                                                                         |                                       
|                                                         |                                                                                                                         | 2003                                   |       | 2002       |   | 2001      
|                                                         |                                                                                                                         |                                        |       |            |   |           
|                                                         |                                                                                                                         |                                        |       | (Restated) |   | (Restated)
|                                                         |                                                                                                                         |                                       
|                                                         |                                                                                                                         | (in millions of United States dollars)
|ASSETS                                                  
|Current assets                                           |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Cash and cash equivalents (Notes 20
    and 22)          |                                                                                                                         | $                                      | 418   |            |   | $          | 1,087 |       |   | $ | 306   |      
|Accounts receivable                                      |                                                                                                                         |                                        | 435   |            |   |            | 251   |       |   |   | 277   |      
|Inventories (Note 9)                                     |                                                                                                                         |                                        | 746   |            |   |            | 576   |       |   |   | 500   |      
|Other (Note 7)                                           |                                                                                                                         |                                        | 112   |            |   |            | 73    |       |   |   | 44    |      
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Total current assets                                     |                                                                                                                         |                                        | 1,711 |            |   |            | 1,987 |       |   |   | 1,127 |      
|Property, plant and equipment (Note 10)                  |                                                                                                                         |                                        | 6,976 |            |   |            | 6,382 |       |   |   | 8,260 |      
|Deferred charges and other assets (Notes 12 and
    20)  |                                                                                                                         |                                        | 319   |            |   |            | 208   |       |   |   | 243   |      
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Total assets                                             |                                                                                                                         | $                                      | 9,006 |            |   | $          | 8,577 |       |   | $ | 9,630 |      
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|LIABILITIES AND SHAREHOLDERS
    EQUITY                
|Current liabilities                                      |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Long-term debt due within one year (Notes 11
    and 20) |                                                                                                                         | $                                      | 103   |            |   | $          | 97    |       |   | $ | 81    |      
|Accounts payable                                         |                                                                                                                         |                                        | 253   |            |   |            | 338   |       |   |   | 132   |      
|Accrued payrolls and benefits                            |                                                                                                                         |                                        | 165   |            |   |            | 118   |       |   |   | 107   |      
|Other accrued liabilities                                |                                                                                                                         |                                        | 332   |            |   |            | 210   |       |   |   | 189   |      
|Income and mining taxes payable                          |                                                                                                                         |                                        | 27    |            |   |            | 167   |       |   |   | 58    |      
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Total current liabilities                                |                                                                                                                         |                                        | 880   |            |   |            | 930   |       |   |   | 567   |      
|Deferred credits and other
    liabilities               |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Long-term debt (Notes 11 and 20)                         |                                                                                                                         |                                        | 1,409 |            |   |            | 1,546 |       |   |   | 759   |      
|Deferred income and mining taxes (Note 7)                |                                                                                                                         |                                        | 1,696 |            |   |            | 1,352 |       |   |   | 2,105 |      
|Post-retirement benefits (Note 12)                       |                                                                                                                         |                                        | 603   |            |   |            | 475   |       |   |   | 451   |      
|Asset retirement obligation (Note 13)                    |                                                                                                                         |                                        | 141   |            |   |            | 119   |       |   |   | 121   |      
|Minority interest                                        |                                                                                                                         |                                        | 415   |            |   |            | 368   |       |   |   | 350   |      
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Total liabilities                                        |                                                                                                                         |                                        | 5,144 |            |   |            | 4,790 |       |   |   | 4,353 |      
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Commitments and contingencies (Note 21)                  |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Shareholders equity                                     |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Convertible debt (Note 14)                               |                                                                                                                         |                                        | 606   |            |   |            | 238   |       |   |   | 231   |      
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Preferred shares (Note 15)                               |                                                                                                                         |                                        |      |            |   |            | 472   |       |   |   | 472   |      
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Common shareholders equity                              |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|                                                         | Common shares issued and outstanding
    186,915,865
    (2002  183,238,351, 2001  182,192,732)
    (Notes 17 and 18) |                                        |       | 2,858      |   |            |       | 2,771 |   |   |       | 2,756 | 
|                                                         | Warrants (Note 16)                                                                                                      |                                        |       | 62         |   |            |       | 62    |   |   |       | 62    | 
|                                                         | Contributed surplus (Note 18)                                                                                           |                                        |       | 562        |   |            |       | 559   |   |   |       | 559   | 
|                                                         | Retained earnings (deficit)                                                                                             |                                        |       | (226       | ) |            |       | (335  | ) |   |       | 1,177 | 
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|                                                         |                                                                                                                         |                                        | 3,256 |            |   |            | 3,057 |       |   |   | 4,554 |      
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Contingently issuable equity (Notes 15 and 17)           |                                                                                                                         |                                        |      |            |   |            | 20    |       |   |   | 20    |      
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Total shareholders equity                               |                                                                                                                         |                                        | 3,862 |            |   |            | 3,787 |       |   |   | 5,277 |      
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      
|Total liabilities and shareholders equity               |                                                                                                                         | $                                      | 9,006 |            |   | $          | 8,577 |       |   | $ | 9,630 |      
|                                                         |                                                                                                                         |                                        |       |            |   |            |       |       |   |   |       |      

The Notes to Consolidated Financial Statements
below are an integral part of these statements.

149



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CONSOLIDATED STATEMENT OF CASH FLOWS

|                                                                          |                                          |                                        |       |            |   |            |        |       |   |   |      |      |  
|------------------------------------------------------------------------- | ---------------------------------------- | -------------------------------------- | ----- | ---------- | - | ---------- | ------ | ----- | - | - | ---- | ---- | -
|                                                                          |                                          |                                       
|                                                                          |                                          | Year ended December 31                
|                                                                          |                                          |                                       
|                                                                          |                                          | 2003                                   |       | 2002       |   | 2001      
|                                                                          |                                          |                                        |       |            |   |           
|                                                                          |                                          |                                        |       | (Restated) |   | (Restated)
|                                                                          |                                          |                                       
|                                                                          |                                          | (in millions of United States dollars)
|Operating activities                                                      |                                          |                                        |       |            |   |            |        |       |   |   |      |     
|Earnings (loss) before minority interest                                  |                                          | $                                      | 187   |            |   | $          | (1,465 | )     |   | $ | 314  |     
|Charges (credits) not affecting cash                                      |                                          |                                        |       |            |   |            |        |       |   |   |      |     
|                                                                          | Depreciation and depletion               |                                        |       | 265        |   |            |        | 255   |   |   |      | 263  |  
|                                                                          | Deferred income and mining taxes         |                                        |       | 26         |   |            |        | (745  | ) |   |      | (127 | )
|                                                                          | Asset impairment charges (Note 4)        |                                        |       |           |   |            |        | 2,415 |   |   |      |     |  
|                                                                          | Other                                    |                                        |       | 81         |   |            |        | 41    |   |   |      | (43  | )
|Decrease (increase) in non-cash working
    capital related to operations |                                          |                                        |       |            |   |            |        |       |   |   |      |     
|                                                                          | Accounts receivable                      |                                        |       | (184       | ) |            |        | (8    | ) |   |      | 88   |  
|                                                                          | Inventories                              |                                        |       | (170       | ) |            |        | (77   | ) |   |      | 20   |  
|                                                                          | Accounts payable and accrued liabilities |                                        |       | 124        |   |            |        | 98    |   |   |      | (10  | )
|                                                                          | Income and mining taxes payable          |                                        |       | (140       | ) |            |        | 106   |   |   |      | (125 | )
|                                                                          | Other                                    |                                        |       | (35        | ) |            |        | (26   | ) |   |      | (10  | )
|Other                                                                     |                                          |                                        | (23   | )          |   |            | 5      |       |   |   | (10  | )   
|                                                                          |                                          |                                        |       |            |   |            |        |       |   |   |      |     
|Net cash provided by operating activities                                 |                                          |                                        | 131   |            |   |            | 599    |       |   |   | 360  |     
|                                                                          |                                          |                                        |       |            |   |            |        |       |   |   |      |     
|Investing activities                                                      |                                          |                                        |       |            |   |            |        |       |   |   |      |     
|Capital expenditures                                                      |                                          |                                        | (591  | )          |   |            | (600   | )     |   |   | (263 | )   
|Other                                                                     |                                          |                                        | 26    |            |   |            | (9     | )     |   |   | 2    |     
|                                                                          |                                          |                                        |       |            |   |            |        |       |   |   |      |     
|Net cash used for investing activities                                    |                                          |                                        | (565  | )          |   |            | (609   | )     |   |   | (261 | )   
|                                                                          |                                          |                                        |       |            |   |            |        |       |   |   |      |     
|Financing activities                                                      |                                          |                                        |       |            |   |            |        |       |   |   |      |     
|Long-term borrowings                                                      |                                          |                                        | 314   |            |   |            | 884    |       |   |   | 2    |     
|Repayments of long-term debt                                              |                                          |                                        | (574  | )          |   |            | (81    | )     |   |   | (192 | )   
|Convertible debt issued                                                   |                                          |                                        | 470   |            |   |            |       |       |   |   | 226  |     
|Preferred shares redeemed                                                 |                                          |                                        | (487  | )          |   |            |       |       |   |   |     |     
|Common shares issued                                                      |                                          |                                        | 60    |            |   |            | 15     |       |   |   | 5    |     
|Preferred dividends paid                                                  |                                          |                                        | (6    | )          |   |            | (26    | )     |   |   | (26  | )   
|Dividends paid to minority interest                                       |                                          |                                        | (7    | )          |   |            | (1     | )     |   |   | (1   | )   
|Other                                                                     |                                          |                                        | (5    | )          |   |            |       |       |   |   |     |     
|                                                                          |                                          |                                        |       |            |   |            |        |       |   |   |      |     
|Net cash provided by (used for) financing
    activities                  |                                          |                                        | (235  | )          |   |            | 791    |       |   |   | 14   |     
|                                                                          |                                          |                                        |       |            |   |            |        |       |   |   |      |     
|Net increase (decrease) in cash and cash
    equivalents                  |                                          |                                        | (669  | )          |   |            | 781    |       |   |   | 113  |     
|Cash and cash equivalents at beginning of year                            |                                          |                                        | 1,087 |            |   |            | 306    |       |   |   | 193  |     
|                                                                          |                                          |                                        |       |            |   |            |        |       |   |   |      |     
|Cash and cash equivalents at end of year
    (Notes 20 and 22)            |                                          | $                                      | 418   |            |   | $          | 1,087  |       |   | $ | 306  |     
|                                                                          |                                          |                                        |       |            |   |            |        |       |   |   |      |     

The Notes to Consolidated Financial Statements
below are an integral part of these statements.

150



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


Note 1. Summary of significant accounting
policies

The consolidated financial statements of Inco
Limited (Inco) and its subsidiaries (referred to as
we, us and our) are prepared
in accordance with Canadian generally accepted accounting
principles (GAAP), consistently applied which, in
our case, conform in all material respects with United States
GAAP except as explained in Note 23.



| |                            
| | ---------------------------
| | Principles of consolidation

The financial statements of entities which are
controlled by Inco either directly or indirectly, through
wholly-owned subsidiaries, are consolidated. Control is
established by our ability to determine strategic, operating,
investing and financing policies without the co-operation of
others. The criteria we use include an analysis of our level of
ownership, voting rights and our level of representation on the
board of directors. We evaluate these criteria in terms of
determining whether the existence of one of the criteria alone
(such as a majority ownership of all voting securities), or a
combination of the criteria when taken together, would result in
having control, or the right to exercise control, of the
management, business focus or strategy and/or critical policies
of the particular entity. Entities which are not controlled and
for which our ownership in all voting securities is greater than
20 per cent are accounted for using the equity method and are
included in deferred charges and other assets. We have no
entities for which we have used the equity method and own less
than 20 per cent of all voting securities. We have no entities
for which we own greater than 50 per cent of all voting
securities but do not consolidate. We do not have subsidiaries
or joint ventures for which we use the proportionate
consolidation method nor do we consolidate any entities for
which we own less than 50 per cent of all voting securities.
Investments in other entities are accounted for using the cost
method.



| |          
| | ---------
| | Estimates

Financial statements prepared in accordance with
GAAP require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Translation of consolidated financial
    statements into United States dollars

These consolidated financial statements are
expressed in United States dollars. The United States dollar is
our functional currency. Accordingly, we use the temporal method
of translation. Monetary assets and liabilities are translated
into United States dollars using year-end rates of exchange. All
other assets and liabilities are translated at applicable
historical rates of exchange. Revenues, expenses and certain
costs are translated at monthly average exchange rates except
for inventoried costs, depreciation and depletion which are
translated at historical rates. Realized exchange gains and
losses and currency translation adjustments are included in
earnings.



| |                          
| | -------------------------
| | Cash and cash equivalents

Cash and cash equivalents comprise cash, time
deposits and other interest bearing instruments with original
maturity dates of less than three months.



| |            
| | -----------
| | Inventories

Inventories consist of finished metal products,
work in process and operating supplies. Inventories are stated
at the lower of cost and estimated net realizable value.

Work in process includes inventory at all stages
in the production process, from stockpiled ore through to final
refined metal. Broken ore in our mines is not recognized as
inventory until delivered to the mine head or temporary storage
areas for blending. Cost includes all direct costs incurred
through to the applicable stage of

151



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


production, including direct labour and
materials, depreciation and depletion as well as an allocated
portion of overheads. Costs are allocated based on contained
metal. For costing purposes, copper and nickel are treated as
co-products and share expenses pro-rata based on pounds unless a
plant is specifically for the upgrading of only one metal or the
other.

Period costs such as shutdown expenses, standby
costs, property write-offs, costs of delivering the product to
the end customer, including freight and sales administration,
are not allocated to inventory but charged directly to cost of
sales and other operating expenses.

The point in our production cycle that costs
related to mine and other property, plant and equipment begin to
be capitalized as a cost of inventory is at the mine head.



| |                              
| | -----------------------------
| | Property, plant and equipment

Property, plant and equipment are stated at cost.
Such cost, in the case of mines and undeveloped properties,
represents related acquisition and development expenditures.
Costs are capitalized for an undeveloped property when it is
probable that such costs will be recovered from the exploitation
of the property. Capitalization ceases when the property is
substantially complete and ready for use. Financing costs,
including interest, are capitalized when they arise from
indebtedness incurred to finance the development, construction
or expansion of significant mineral properties and facilities.
Development costs are charged as an expense in the period
incurred unless we believe a development project meets generally
accepted criteria for deferral and amortization.



| |                                   
| | ----------------------------------
| | Research and development
    costs

Research costs are expensed in the period in
which they are incurred. Development costs are capitalized where
the product or process is clearly defined, the technical
feasibility has been established and we are committed to, and
have the resources to, complete the project.



| |                 
| | ----------------
| | Asset impairment

When the net carrying value of an item or group
of items of property, plant and equipment exceeds the estimated
undiscounted future net cash flows together with its residual
value, the excess of the carrying value over the fair value is
charged to earnings. In estimating future net cash flows, assets
are grouped at the lowest level for which there are identifiable
cash flows that are largely independent of cash flows from other
asset groups taking into consideration movements of intermediate
products to ensure the utilization of available capacity across
our operations. Generally, all assets at a particular operation
are used together to generate cash flow. Estimates of future
cash flows are subject to risks and uncertainties.

We periodically review our equity method
investments to determine whether a decline in fair value (as
measured by discounted future cash flows) below the carrying
amount is other than temporary.



| |                    
| | -------------------
| | Revenue recognition

Our primary products are nickel and copper. Most
of our nickel is sold as refined nickel and our copper is
predominantly sold as copper cathode. We also sell precious
metals, cobalt and other by-products. Sales of all commodities
are recognized as revenue when title has passed under the terms
of the relevant contracts or sale, which is generally when
shipped. Net sales include revenues from the sale of all metals
produced by us, including metals which we refer to as
by-products as well as sulphuric acid and liquid sulphur.

For most of our sales, the price is fixed at the
time revenue is recognized, and is based on quoted commodity
prices on recognized exchanges. A small portion of our revenues
are provisionally priced at the time of shipment. For
provisionally priced sales, final settlement is generally based
on the average LME cash nickel price for a specified future
period generally after the month of arrival at the
customers facility which is within 90 days of sale.
As such any proceeds received represent provisional sales
proceeds and not final sales proceeds.

152



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)




| |            
| | -----------
| | Exploration

Exploration expenditures are expensed as incurred
except in areas currently under development, where production is
probable, or in areas under feasibility study, where there is a
reasonable expectation to convert existing estimated mineral
resources to estimated ore reserves and add additional mineral
resources with additional drilling and evaluations in areas near
existing ore reserves, and existing or planned production
facilities, in which case they are capitalized and amortized
using the unit-of-production method.



| |                           
| | --------------------------
| | Depreciation and depletion

Property, plant and equipment is generally
depreciated on a straight line basis over the following
estimated economic lives:

|                           |  |               
|-------------------------- |  | --------------
|Mine and mobile equipment  |  | 3 to 10 years 
|Processing facilities      |  | 15 to 20 years
|Smelter equipment          |  | 15 to 20 years
|Refinery equipment         |  | 5 to 20 years 
|Power generation equipment |  | 10 to 20 years
|Furniture and fixtures     |  | 10 years      

The estimated economic life is assessed on an
annual basis, taking into account the state of the equipment,
technological changes and the related facilities or the
estimated proven and probable ore reserves where the equipment
is located. Some equipment has an estimated economic life in
excess of 20 years, and is being amortized on a 5 per cent
declining balance basis. When an assessment is made that the
remaining life of that equipment is less than 20 years, the
depreciation method is switched to straight line. Depreciation
starts when the asset is ready for use.

Mine development costs are amortized on a
composite basis based on our twenty-year mine plan. Total
historical capitalized costs and estimated future development
costs relating to developed and undeveloped ore reserves are
depreciated using the unit-of-production method based on total
developed and undeveloped estimated proven and probable ore
reserves. Amortization is limited to forecast production in the
twenty-year mine plan even where we have additional estimated
proven and probable ore reserves. Depletion starts when
production commences.

For our nickel operations in Indonesia, property,
plant and equipment and mine development costs are amortized
using the unit-of-production method described in the preceding
paragraph.



| |                             
| | ----------------------------
| | Asset retirement obligations

The accounting for asset retirement obligations
encompasses the accounting for legal obligations associated with
the retirement of a tangible long-lived asset that results from
the acquisition, construction or development and/or the normal
operation of a long-lived asset. The retirement of a long-lived
asset is its other than temporary removal from service,
including its sale, abandonment, recycling or disposal in some
other manner but not its temporary idling.

We recognize asset retirement obligations as
liabilities when a legal obligation with respect to the
retirement of an asset is incurred, with the initial measurement
of the obligation at fair value. These obligations are accreted
to full value over time through charges to income. In addition,
an asset retirement cost equivalent to the liabilities is
capitalized as part of the related assets carrying value
and is subsequently depreciated over the assets useful
life. A liability for an asset retirement obligation is incurred
over more than one reporting period when the events that create
the obligation occur over more than one reporting period. For
example, if a facility is permanently closed but the closure
plan is developed over more than one reporting period, the cost
of the closure of the facility is incurred over the reporting
periods when the closure plan is finalized. Any incremental
liability incurred in a

153



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


subsequent reporting period is considered to be
an additional layer of the original liability. Each layer is
initially measured at fair value. As required, a separate layer
shall be measured and recognized and accounted for
prospectively. Our asset retirement obligations consist
primarily of costs associated with mine reclamation and closure
activities.

Our operations have been, and may in the future
be, affected from time to time in varying degrees by changes in
environmental laws and regulations, including those for asset
retirement obligation costs. Both the likelihood of future
changes in laws and regulations and their overall effect upon us
vary greatly from country to country and are not predictable.
Our policy is to meet or, if possible, surpass environmental
standards set by relevant legislation, by the application of
technically proven and economically feasible measures.

For environmental issues that may not involve the
retirement of an asset, where we are a responsible party and it
is determined that a liability exists, and amounts can be
quantified and determined, we will accrue for the estimated
liability. In determining whether a liability exists in respect
of such environmental issues, we apply the criteria for
liability recognition under applicable accounting standards



| |                        
| | -----------------------
| | Income and mining taxes

Income and mining taxes comprise the provision
(relief) for taxes actually paid or payable (received or
receivable) and deferred taxes. Deferred income and mining taxes
are computed using the asset and liability method whereby
deferred income and mining tax assets and liabilities are
recognized for the expected future tax consequences attributable
to temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial
statements. Deferred income and mining tax assets and
liabilities are computed using current foreign currency exchange
rates and using income tax rates in effect when the temporary
differences are expected to reverse. The effect on deferred
income and mining tax assets and liabilities of a change in tax
rates is recognized in earnings in the period of substantive
enactment. The provision or relief for deferred income and
mining taxes is based on the changes in deferred income and
mining tax assets and liabilities during the period. In
estimating deferred income and mining tax assets, a valuation
allowance is determined to reduce the future income tax assets
to that amount that it is more likely than not to be realized.

Investment tax credits are accounted for by the
cost reduction method whereby investment tax credits related to
the acquisition of assets are deferred and recognized in
earnings as the related assets are depreciated, while those
related to research and development expenses are included in
earnings.



| |                                                    
| | ---------------------------------------------------
| | Financial instruments and commodities
    contracts

Forward, option and swap contracts are
periodically used to hedge the effect of exchange rate changes
on our future currency requirements. In addition, forward,
option and swap contracts are used to hedge the effect of price
changes on a portion of the metals we sell. Fuel oil swap
contracts are used to hedge the effect of price changes in
respect of a portion of our energy requirements in Indonesia.
Gains and losses on these contracts are deferred and recognized
as a component of the related transaction. Interest rate swaps
are used to hedge interest rate risk exposure. Amounts
receivable or payable related to the swaps are recorded in
interest expense concurrently with the interest expense of the
underlying debt. We also purchase and sell foreign currencies
and metals by using forward contracts which have not been
specifically identified as hedges. The values of these contracts
are marked to market with resulting gains and losses included in
earnings.



| |                         
| | ------------------------
| | Post-retirement benefits

The cost of providing benefits through defined
benefit pensions and post-retirement benefits other than
pensions is actuarially determined and recognized in earnings
using the projected benefit method prorated on service.
Differences arising from plan amendments are recognized in
earnings over the expected average remaining service life of
employees. Differences arising from changes in assumptions and
experience gains and losses are recognized in earnings by
amortizing the excess of the net actuarial gains and losses over
10 per cent of

154



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


the greater of the post-retirement benefits
obligation and the fair value of plan assets over the expected
average remaining service life of employees. The cost of
providing benefits through defined contribution pension plans is
charged to earnings in the period in respect of which
contributions become payable.



| |                         
| | ------------------------
| | Stock compensation plans

Cash received from employees upon exercise of
options to purchase Common Shares is credited to then issued and
outstanding Common Shares. In respect of Common Share
appreciation rights, compensation expense is determined and
accrued over the vesting period of the options based on the
excess of the quoted market value of the respective shares over
the exercise price. In respect of our other stock options, we
recognize as an expense the cost over the vesting period based
on the estimated fair value of the stock options. The fair value
of each stock option granted is estimated on the date of the
grant using an option-pricing model.



| |                                         
| | ----------------------------------------
| | Net earnings (loss) per Common
    Share

Basic earnings (loss) per Common Share is
computed by dividing net earnings (loss) applicable to Common
Shares by the weighted-average number of Common Shares issued
and outstanding for the relevant period. Diluted earnings (loss)
per Common Share is computed by dividing net earnings applicable
to Common Shares, as adjusted for the effects of dilutive
convertible securities, by the sum of the weighted-average
number of Common Shares issued and outstanding and all
additional Common Shares that would have been outstanding if
potentially dilutive Common Shares had been issued.



| |                                             
| | --------------------------------------------
| | Generally accepted accounting
    principles

Effective January 1, 2004, we will adopt
Canadian Institute of Chartered Accountants (CICA)
section 1100, Generally Accepted Accounting Principles.
CICA 1100 describes what constitutes Canadian GAAP and its
sources. We are currently evaluating how this standard will be
implemented and what impact the adoption of this new standard
will have on our consolidated financial statements.

Note 2. Changes in accounting
policies



| |                                 
| | --------------------------------
| | (a) Stock-based
    compensation

Effective January 1, 2003, we changed our
accounting for stock options from the intrinsic value method to
one that recognizes as an expense the cost of stock-based
compensation based on the estimated fair value of new stock
options granted to employees in 2003 and in future years. The
fair value of each stock option granted is estimated on the date
of the grant using an option-pricing model. As a result of this
change in accounting policy, which was applied prospectively, an
expense of $3 million was recorded in 2003, to reflect the
fair value of stock options granted to employees in 2003.



| |                                        
| | ---------------------------------------
| | (b) Impairment of long-lived
    assets

Effective January 1, 2003, we adopted a new
accounting standard of the CICA in respect of the impairment or
disposal of long-lived assets. The new standard requires that a
fair value determination be made for long-lived assets to be
disposed of by sale, whether previously held and used or newly
acquired, and broadens the presentation of discontinued
operations to include more disposal transactions. The initial
adoption of the new standard had no impact on our results of
operations or financial condition.



| |                                     
| | ------------------------------------
| | (c) Asset retirement
    obligations

Effective January 1, 2003, we adopted a new
accounting standard of the CICA relating to asset retirement
obligations. This standard significantly changed the method of
accounting for asset retirement obligation costs. Under this new
standard, asset retirement obligations are recognized when
incurred and recorded as liabilities at

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


fair value. The liability is accreted over time
through periodic charges to earnings. In addition, the asset
retirement cost is capitalized as part of the assets
carrying value and depreciated over the assets useful
life. This change in accounting policy was applied retroactively
and, accordingly, the consolidated financial statements of prior
periods were restated. As a result of this change, certain
balance sheet accounts as of December 31, 2002 were
restated as follows: the deficit increased by $18 million
(2001  $17 million); property, plant and
equipment increased by $37 million (2001 
$43 million); deferred income and mining taxes decreased by
$12 million (2001  $12 million); and the
asset retirement obligation increased by $67 million
(2001  $72 million). Net earnings have been
reduced by $1 million each for the years ended
December 31, 2002 and December 31, 2001.



| |                                     
| | ------------------------------------
| | (d) Foreign currency
    translation

Effective January 1, 2002, we adopted a new
standard of the CICA in respect of foreign currency translation
that eliminated the deferral and amortization of currency
translation adjustments related to long-term monetary items with
a fixed and ascertainable life. There was no significant impact
on our results of operations or financial condition as a result
of the adoption of this standard.



| |                       
| | ----------------------
| | (e) Earnings Per Share

Effective January 1, 2001, we adopted,
retroactively, as a change in accounting policy, a new
accounting standard of the CICA in respect of earnings per
share. This new standard changed the method in which diluted
earnings per share are calculated.



| |                                     
| | ------------------------------------
| | (f) Interim Financial
    Statements

Effective January 1, 2001, we adopted,
retroactively, a new accounting standard of the CICA in respect
of interim financial statements. As a consequence, we changed
our accounting policy, for interim reporting purposes only, in
connection with the timing of recognizing the costs associated
with the planned annual shutdown of operations for maintenance.
Previously, these costs were expensed evenly over the year
whereas under the new standard such costs are expensed in the
period in which they are incurred.

Note 3. Strike expenses

A strike of the unionized workforce at our
Ontario operations began on June 1, 2003 and a new
collective agreement ending the strike was entered into at the
end of August 2003. Strike expenses are those ongoing costs,
such as salaries and certain employment benefits, depreciation,
property taxes, utilities and maintenance incurred during the
strike period which would normally be treated as production
costs and charged to inventory but, in the absence of
production, have been expensed because we were not achieving
commercial production at the related facilities over the period
of the strike. During the course of this 13-week strike, we
incurred strike expenses in the amount of $107 million
during 2003. Included in these expenses was depreciation expense
of $19 million in 2003. The balance of the strike expenses
was included in cost of sales and other operating expenses.

Note 4. Asset impairment
charges

On June 11, 2002, we announced that we would
be undertaking a review of the net carrying value of our
Voiseys Bay project in view of the statement of principles
entered into with the Government of the Province of Newfoundland
and Labrador on that date and other arrangements with key
stakeholders that would enable the development of that project
to proceed. We had noted on a number of occasions in our public
filings and other documents that such events, if and when they
were to occur, might require a significant reduction in the
carrying value of the Voiseys Bay project and in the
related deferred income and mining tax liability and in
shareholders equity. This review, which was completed in
July 2002, included an analysis of the key assumptions which we
utilized in evaluating this net carrying value on a
quarter-to-quarter basis relating to a number of important

156



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


factors, including our best assessment of the
expected cash flows from the project, how the development of
Voiseys Bay, taking into account the agreements which have
been reached, fits within our overall long-term development
plans and updated mining and other cost assumptions. As a result
of this review, we recorded a non-cash charge of
$1,552 million, net of deferred income and mining taxes of
$770 million in 2002.

In addition, in 2002, we recorded a non-cash
charge of $74 million, net of income and mining taxes of
$19 million to reduce the carrying values of certain plant,
equipment and other assets to their estimated net recoverable
amounts based on an evaluation of their recoverability. The
principal component of this charge related to capitalized
exploration and development costs of the Victor Deep exploration
project at our Ontario operations that, as a result of the
development of the deposits covered by our Voiseys Bay
projects, would probably not be put into production. The balance
of this charge consisted primarily of reductions to certain
redundant plant, equipment and non-core assets as well as an
additional provision for losses relating to certain receivables
and other assets arising from our commercial relationships with
one of our principal customers that had filed for bankruptcy
protection in late March 2002.

Note 5. Goro project suspension
costs

In early September 2002, the Goro project
experienced temporary labour disruptions by personnel associated
with certain project construction subcontractors. As a result of
these disruptions, a decision was made to curtail certain
activities at the projects site to enable us, contractors,
subcontractors and other interested parties to develop
procedures to avoid future disruptions. Over the September
November 2002 period, a number of procedures were put in place
as part of a phased resumption of certain of the project
activities that had been curtailed. During this period, we also
initiated an update of the status of certain key aspects of the
project, including the necessary permitting, capital cost
estimate, project schedule and organization. Work on certain
critical parts of the project, including engineering, continued
during this update process.

On December 5, 2002, we announced that we
would be undertaking a comprehensive review of the Goro project.
This action had been based upon information from the
projects principal firms providing project engineering,
procurement and construction management services that we had
received that, if confirmed, would indicate an increase in the
capital cost for the project in the range of 30 to 45 per cent
above the then current capital cost estimate of
$1,450 million. As a result of the temporary suspension of
certain development activities and other actions which had been
taken by year-end 2002 during this review process, we recorded a
pre-tax charge of $25 million in the fourth quarter of
2002. This charge comprised $62 million relating to the
cancellation or termination of certain outstanding contractual
obligations, to accrue for demobilization costs and to reduce
the carrying value of certain assets relating to the project,
partially offset by currency hedging gains of $37 million on
certain forward currency contracts. These contracts, which had
been entered into to reduce exposure to exchange rate changes
associated with certain planned project expenditures to be
incurred in certain currencies, were closed out in early January
2003 since they no longer matched the timing of such
expenditures due to their expected deferral as a result of the
review being undertaken. The close out of these contracts
resulted in a further gain of $11 million during the first
quarter of 2003 which was recorded as other income.

In 2003, additional contracts became ineffective
which resulted in a further gain of $21 million. These
gains were partially offset by expenses of $17 million
incurred for the on-going care and custody costs associated with
the construction site while the project is under suspension. The
overall project review process is still underway given its
planned scope. We do not currently expect to be in a position to
report on the results of this review, including an updated
capital cost estimate for the project and project schedule, and
the additional effect, if any, that this review could have on
our results of operations and financial condition, until at
least the summer of 2004.

157



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)




|        |                  
|------- | -----------------
|Note 6. | Other income, net

Other income (expense), net is comprised of the
following:

|                                                                   |  |                        |     |      |  |      |    |  |  |   |    |  
|------------------------------------------------------------------ |  | ---------------------- | --- | ---- |  | ---- | -- |  |  | - | -- | -
|                                                                   |  |                       
|                                                                   |  | Year ended December 31
|                                                                   |  |                       
|                                                                   |  | 2003                   |     | 2002 |  | 2001
|                                                                   |  |                        |     |      |  |     
|Interest income                                                    |  | $                      | 16  |      |  | $    | 13 |  |  | $ | 14 |  
|Gains from sales of securities and other assets                    |  |                        | 59  |      |  |      | 5  |  |  |   |   |  
|Gains from derivative positions in metals                          |  |                        | 12  |      |  |      |   |  |  |   |   |  
|Interest from a tax refund                                         |  |                        | 7   |      |  |      | 14 |  |  |   |   |  
|Gain from closure of ineffective derivative
    contracts (Note 5) |  |                        | 11  |      |  |      |   |  |  |   |   |  
|Loss on redemption of securities                                   |  |                        | (2  | )    |  |      |   |  |  |   |   |  
|Other, net                                                         |  |                        | 1   |      |  |      | 8  |  |  |   | (1 | )
|                                                                   |  |                        |     |      |  |      |    |  |  |   |    |  
|Other income, net                                                  |  | $                      | 104 |      |  | $    | 40 |  |  | $ | 13 |  
|                                                                   |  |                        |     |      |  |      |    |  |  |   |    |  

Gains from sales of securities and other assets
included a milestone payment under the terms of sale of a
non-core exploration property in 1998 in the amount of
$24 million as well as $35 million realized from the
sale or transfer of shares and other interests contributed to or
received in conjunction with strategic and other collaborations
relating to our primary metals operations.



|        |                        
|------- | -----------------------
|Note 7. | Income and mining taxes

In carrying on our mining operations, we are
subject to both income and mining taxes. The amount of such
taxes will vary depending on the provisions set out by the
relevant legislative authority. Generally, most expenditures
incurred by us are deductible in computing income tax, whereas
mining tax legislation, although based on a measure of
profitability from carrying on mining operations, is more
restrictive in respect of the deductions permitted in computing
income subject to mining tax. In most jurisdictions deductions
for financing expenses, such as interest and royalties, are not
allowed to be claimed in computing income subject to mining tax.
In addition, income unrelated to carrying on mining operations
would not be subject to mining tax.

The provision (relief) for income and mining
taxes was as follows:

|                        |          |                        |     |      |   |            |      |      |   |   |      |      |  
|----------------------- | -------- | ---------------------- | --- | ---- | - | ---------- | ---- | ---- | - | - | ---- | ---- | -
|                        |          |                       
|                        |          | Year ended December 31
|                        |          |                       
|                        |          | 2003                   |     | 2002 |   | 2001      
|                        |          |                        |     |      |   |           
|                        |          |                        |     |      |   | (Restated)
|Current taxes           |          |                        |     |      |   |            |      |      |   |   |      |     
|                        | Canadian |                        | $   | (47  | ) |            | $    | 129  |   |   | $    | 26   |  
|                        | Foreign  |                        |     | 11   |   |            |      | (10  | ) |   |      | 18   |  
|                        |          |                        |     |      |   |            |      |      |   |   |      |     
|                        |          |                        | (36 | )    |   |            | 119  |      |   |   | 44   |     
|                        |          |                        |     |      |   |            |      |      |   |   |      |     
|Deferred taxes          |          |                        |     |      |   |            |      |      |   |   |      |     
|                        | Canadian |                        |     | (61  | ) |            |      | (776 | ) |   |      | (146 | )
|                        | Foreign  |                        |     | 48   |   |            |      | 18   |   |   |      | 17   |  
|                        |          |                        |     |      |   |            |      |      |   |   |      |     
|                        |          |                        | (13 | )    |   |            | (758 | )    |   |   | (129 | )   
|                        |          |                        |     |      |   |            |      |      |   |   |      |     
|Income and mining taxes |          | $                      | (49 | )    |   | $          | (639 | )    |   | $ | (85  | )   
|                        |          |                        |     |      |   |            |      |      |   |   |      |     

158



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


Earnings (loss) before income and mining taxes
and minority interest, by geographic source, were as follows:

|        |  |                        |     |            |  |            |        |   |  |   |     | 
|------- |  | ---------------------- | --- | ---------- |  | ---------- | ------ | - |  | - | --- | 
|        |  |                       
|        |  | Year ended December 31
|        |  |                       
|        |  | 2003                   |     | 2002       |  | 2001      
|        |  |                        |     |            |  |           
|        |  |                        |     | (Restated) |  | (Restated)
|Canada  |  | $                      | 63  |            |  | $          | (2,067 | ) |  | $ | 142 | 
|Foreign |  |                        | 75  |            |  |            | (37    | ) |  |   | 87  | 
|        |  |                        |     |            |  |            |        |   |  |   |     | 
|        |  | $                      | 138 |            |  | $          | (2,104 | ) |  | $ | 229 | 
|        |  |                        |     |            |  |            |        |   |  |   |     | 

The reconciliation between taxes at the combined
federal-provincial statutory income tax rate in Canada and the
effective income and mining tax rate was as follows:

|                                                                                         |  |                        |      |            |  |            |      |   |  |   |      |  
|---------------------------------------------------------------------------------------- |  | ---------------------- | ---- | ---------- |  | ---------- | ---- | - |  | - | ---- | -
|                                                                                         |  |                       
|                                                                                         |  | Year ended December 31
|                                                                                         |  |                       
|                                                                                         |  | 2003                   |      | 2002       |  | 2001      
|                                                                                         |  |                        |      |            |  |           
|                                                                                         |  |                        |      | (Restated) |  | (Restated)
|Provision (relief) at Combined Canadian
    federal-provincial statutory income tax rate |  | $                      | 56   |            |  | $          | (863 | ) |  | $ | 96   |  
|Resource and depletion allowances                                                        |  |                        | (12  | )          |  |            | (27  | ) |  |   | (24  | )
|                                                                                         |  |                        |      |            |  |            |      |   |  |   |      |  
|Adjusted income taxes                                                                    |  |                        | 44   |            |  |            | (890 | ) |  |   | 72   |  
|Mining taxes                                                                             |  |                        | 17   |            |  |            | 20   |   |  |   | 17   |  
|                                                                                         |  |                        |      |            |  |            |      |   |  |   |      |  
|                                                                                         |  |                        | 61   |            |  |            | (870 | ) |  |   | 89   |  
|Currency translation adjustments                                                         |  |                        | 42   |            |  |            | 20   |   |  |   | (2   | )
|Currency translation adjustments on long-term debt                                       |  |                        | 48   |            |  |            |     |   |  |   |     |  
|Non-deductible losses (non-taxable gains)                                                |  |                        | (33  | )          |  |            | 30   |   |  |   | 1    |  
|Tax rate changes                                                                         |  |                        | (142 | )          |  |            | (6   | ) |  |   | (173 | )
|Foreign tax rate differences                                                             |  |                        | (19  | )          |  |            | (10  | ) |  |   | (8   | )
|Asset impairment charges                                                                 |  |                        |     |            |  |            | 182  |   |  |   |     |  
|Other                                                                                    |  |                        | (6   | )          |  |            | 15   |   |  |   | 8    |  
|                                                                                         |  |                        |      |            |  |            |      |   |  |   |      |  
|Effective income and mining taxes                                                        |  | $                      | (49  | )          |  | $          | (639 | ) |  | $ | (85  | )
|                                                                                         |  |                        |      |            |  |            |      |   |  |   |      |  

159



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


Deferred income and mining tax liabilities and
assets consisted of the following:

|                                             |                                   |             |       |            |  |            |       |       |  |   |       |       | 
|-------------------------------------------- | --------------------------------- | ----------- | ----- | ---------- |  | ---------- | ----- | ----- |  | - | ----- | ----- | 
|                                             |                                   |            
|                                             |                                   | December 31
|                                             |                                   |            
|                                             |                                   | 2003        |       | 2002       |  | 2001      
|                                             |                                   |             |       |            |  |           
|                                             |                                   |             |       | (Restated) |  | (Restated)
|Liabilities:                                 |                                   |             |       |            |  |            |       |       |  |   |       |      
|                                             | Property, plant and equipment     |             | $     | 1,879      |  |            | $     | 1,589 |  |   | $     | 2,312 | 
|                                             | Deferred charges and other assets |             |       | 65         |  |            |       | 23    |  |   |       | 29    | 
|                                             | Long-term debt                    |             |       | 48         |  |            |       |      |  |   |       |      | 
|                                             | Other                             |             |       |           |  |            |       | 2     |  |   |       | 3     | 
|                                             |                                   |             |       |            |  |            |       |       |  |   |       |      
|                                             |                                   |             | 1,992 |            |  |            | 1,614 |       |  |   | 2,344 |      
|                                             |                                   |             |       |            |  |            |       |       |  |   |       |      
|Assets:                                      |                                   |             |       |            |  |            |       |       |  |   |       |      
|                                             | Long-term debt                    |             |       |           |  |            |       | 23    |  |   |       | 23    | 
|                                             | Post-retirement benefits          |             |       | 204        |  |            |       | 142   |  |   |       | 141   | 
|                                             | Asset retirement obligations      |             |       | 45         |  |            |       | 44    |  |   |       | 43    | 
|                                             | Tax loss carryforwards            |             |       | 70         |  |            |       | 106   |  |   |       | 75    | 
|                                             | Other                             |             |       | 4          |  |            |       | 4     |  |   |       | 5     | 
|                                             |                                   |             |       |            |  |            |       |       |  |   |       |      
|                                             |                                   |             | 323   |            |  |            | 319   |       |  |   | 287   |      
|Valuation allowance                          |                                   |             | (27   | )          |  |            | (57   | )     |  |   | (48   | )    
|                                             |                                   |             |       |            |  |            |       |       |  |   |       |      
|                                             |                                   |             | 296   |            |  |            | 262   |       |  |   | 239   |      
|                                             |                                   |             |       |            |  |            |       |       |  |   |       |      
|Net deferred income and mining tax liability |                                   | $           | 1,696 |            |  | $          | 1,352 |       |  | $ | 2,105 |      
|                                             |                                   |             |       |            |  |            |       |       |  |   |       |      

The restatements reflect a reclassification of
previously reported amounts and the inclusion of the deferred
tax asset and corresponding increase in valuation allowance in
respect of the tax effect of potential Canadian tax losses which
would arise if U.S. dollar denominated debt held by Inco
and its Canadian subsidiaries was settled at the Canadian/ U.S.
exchange rates in effect at the relevant reporting date. These
restatements do not result in a change to our deferred income
tax position in any of the years reported.

At December 31, 2003, other current assets
included current and deferred income and mining taxes of
$94 million (2002  $51 million;
2001  $39 million).

During 2001, tax legislation was passed covering
projects meeting certain criteria. Goro Nickel S.A. qualified
for certain tax incentives under this legislation in connection
with its Goro project in New Caledonia. These incentives include
an income tax holiday during the construction phase of the
project and throughout a 15-year period commencing in the first
year in which commercial production is achieved, as defined by
the applicable legislation, followed by a five-year,
50 per cent income tax holiday. In addition Goro
Nickel S.A. would qualify for certain exemptions from
indirect taxes such as import duties during the construction
phase and throughout the commercial life of the project. Certain
of these tax benefits, including the income tax holiday, are
subject to an earlier phase out should the project achieve a
specified cumulative rate of return. To date, we have not
realized any net income for New Caledonia tax purposes and the
benefits of this legislation are expected to apply with respect
to any income taxes otherwise payable once the Goro project is
in operation.

In determining the likelihood of realizing an
income tax asset we take into account a number of factors,
including current conditions and anticipated changes in mine or
production plans.

We have non-capital loss carry forwards in the
amount of $60 million available for New Caledonia income
tax purposes. These losses expire in 2007 and 2008. The benefits
of these tax loss carry forwards have not been recognized for
accounting purposes.

160



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


We have capital loss carry forwards in the amount
of $38 million available for United Kingdom income tax
purposes to reduce taxable income in certain circumstances. The
capital losses may be carried forward indefinitely. The benefits
of these tax loss carry forwards have not been recognized for
accounting purposes.

In computing our income tax liability, no amount
has been recorded in respect of additional potential taxes which
might arise should we distribute income realized in certain of
our foreign subsidiaries on the basis that it is our intention
to reinvest such income in the foreign operations of the
relevant subsidiary. Should managements intentions change
in respect of such distribution, additional taxes, if any, would
be recorded in respect of the distribution from, or disposition
or liquidation of, the relevant foreign entity. For those
foreign entities from which distributions occur on a regular
basis, any additional taxes that would arise on such
distributions, if any, have been included in deriving the annual
income tax provision for the year in which the income is earned
by the foreign subsidiary.

Note 8. Net earnings (loss) per
Common Share

The computation of basic and diluted earnings
(loss) per share was as follows:

|                                                |                                                            |                        |      |            |   |            |       |         |   |   |      |         |  
|----------------------------------------------- | ---------------------------------------------------------- | ---------------------- | ---- | ---------- | - | ---------- | ----- | ------- | - | - | ---- | ------- | -
|                                                |                                                            |                       
|                                                |                                                            | Year ended December 31
|                                                |                                                            |                       
|                                                |                                                            | 2003                   |      | 2002       |   | 2001      
|                                                |                                                            |                        |      |            |   |           
|                                                |                                                            |                        |      | (Restated) |   | (Restated)
|Basic earnings (loss) per share
    computation |                                                            |                        |      |            |   |            |       |         |   |   |      |        
|Numerator:                                      |                                                            |                        |      |            |   |            |       |         |   |   |      |        
|                                                | Net earnings (loss)                                        |                        | $    | 137        |   |            | $     | (1,482  | ) |   | $    | 304     |  
|                                                | Dividends on preferred shares                              |                        |      | (6         | ) |            |       | (26     | ) |   |      | (26     | )
|                                                | Accretion of convertible debt                              |                        |      | (7         | ) |            |       | (4      | ) |   |      | (3      | )
|                                                | Premium on redemption of preferred shares                  |                        |      | (15        | ) |            |       |        |   |   |      |        |  
|                                                |                                                            |                        |      |            |   |            |       |         |   |   |      |        
|                                                | Net earnings (loss) applicable to common
    shares        |                        | $    | 109        |   |            | $     | (1,512  | ) |   | $    | 275     |  
|                                                |                                                            |                        |      |            |   |            |       |         |   |   |      |        
|Denominator:                                    |                                                            |                        |      |            |   |            |       |         |   |   |      |        
|                                                | Weighted-average common shares outstanding
    (thousands) |                        |      | 184,500    |   |            |       | 182,830 |   |   |      | 182,074 |  
|                                                |                                                            |                        |      |            |   |            |       |         |   |   |      |        
|Basic earnings (loss) per common share          |                                                            | $                      | 0.59 |            |   | $          | (8.27 | )       |   | $ | 1.51 |        
|                                                |                                                            |                        |      |            |   |            |       |         |   |   |      |        

161



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


|                                                  |                                                                        |                        |      |            |       |            |       |         |   |   |      |         |       | 
|------------------------------------------------- | ---------------------------------------------------------------------- | ---------------------- | ---- | ---------- | ----- | ---------- | ----- | ------- | - | - | ---- | ------- | ----- | 
|                                                  |                                                                        |                       
|                                                  |                                                                        | Year ended December 31
|                                                  |                                                                        |                       
|                                                  |                                                                        | 2003                   |      | 2002       |       | 2001      
|                                                  |                                                                        |                        |      |            |       |           
|                                                  |                                                                        |                        |      | (Restated) |       | (Restated)
|Diluted earnings (loss) per share
    computation |                                                                        |                        |      |            |       |            |       |         |   |   |      |        
|Numerator:                                        |                                                                        |                        |      |            |       |            |       |         |   |   |      |        
|                                                  | Net earnings (loss) applicable to common
    shares                    |                        | $    | 109        |       |            | $     | (1,512  | ) |   | $    | 275     |      
|                                                  | Dilutive effect of:                                                    |                        |      |            |       |            |       |         |   |   |      |         |      
|                                                  |                                                                        | Convertible debentures |      |            | 2     |            |       |         |  |   |      |         | 6     | 
|                                                  |                                                                        |                        |      |            |       |            |       |         |   |   |      |        
|                                                  | Net earnings (loss) applicable to common
    shares, assuming dilution |                        | $    | 111        |       |            | $     | (1,512  | ) |   | $    | 281     |      
|                                                  |                                                                        |                        |      |            |       |            |       |         |   |   |      |        
|Denominator:                                      |                                                                        |                        |      |            |       |            |       |         |   |   |      |        
|                                                  | Weighted-average common shares outstanding
    (thousands)             |                        |      | 184,500    |       |            |       | 182,830 |   |   |      | 182,074 |      
|                                                  | Dilutive effect of:                                                    |                        |      |            |       |            |       |         |   |   |      |         |      
|                                                  |                                                                        | Convertible debentures |      |            | 4,360 |            |       |         |  |   |      |         | 5,750 | 
|                                                  |                                                                        | Stock options          |      |            | 1,707 |            |       |         |  |   |      |         | 868   | 
|                                                  |                                                                        | Warrants               |      |            | 1,308 |            |       |         |  |   |      |         |      | 
|                                                  |                                                                        |                        |      |            |       |            |       |         |   |   |      |        
|                                                  | Weighted-average common shares outstanding,
    assuming dilution      |                        |      | 191,875    |       |            |       | 182,830 |   |   |      | 188,692 |      
|                                                  |                                                                        |                        |      |            |       |            |       |         |   |   |      |        
|Diluted earnings (loss) per common share          |                                                                        | $                      | 0.58 |            |       | $          | (8.27 | )       |   | $ | 1.49 |        
|                                                  |                                                                        |                        |      |            |       |            |       |         |   |   |      |        

At December 31, 2003, convertible debt which
is convertible into nil Common Shares (2002 
9,705,111; 2001  4,180,601), options on
819,000 Common Shares (2002  7,476,506;
2001  5,261,534), Preferred Shares convertible into
nil Common Shares (2002  11,277,868; 2001 
11,277,987) and Warrants exercisable for nil Common Shares
(2002  11,023,497; 2001  11,021,947) were
excluded from the computation of diluted earnings
(loss) per Common Share because their effects were not
dilutive.

Note 9. Inventories

Inventories consisted of the following:

|                  |  |             |     |      |  |      |     |  |  |   |     | 
|----------------- |  | ----------- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                  |  |            
|                  |  | December 31
|                  |  |            
|                  |  | 2003        |     | 2002 |  | 2001
|                  |  |             |     |      |  |     
|Finished metals   |  | $           | 193 |      |  | $    | 149 |  |  | $ | 145 | 
|In-process metals |  |             | 478 |      |  |      | 361 |  |  |   | 290 | 
|Supplies          |  |             | 75  |      |  |      | 66  |  |  |   | 65  | 
|                  |  |             |     |      |  |      |     |  |  |   |     | 
|                  |  | $           | 746 |      |  | $    | 576 |  |  | $ | 500 | 
|                  |  |             |     |      |  |      |     |  |  |   |     | 

162



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


Note 10. Property, plant and
equipment

Property, plant and equipment consisted of the
following:

|                                             |  |             |        |            |  |            |        |  |  |   |        | 
|-------------------------------------------- |  | ----------- | ------ | ---------- |  | ---------- | ------ |  |  | - | ------ | 
|                                             |  |            
|                                             |  | December 31
|                                             |  |            
|                                             |  | 2003        |        | 2002       |  | 2001      
|                                             |  |             |        |            |  |           
|                                             |  |             |        | (Restated) |  | (Restated)
|Mines and mining plants                      |  | $           | 2,902  |            |  | $          | 2,806  |  |  | $ | 2,746  | 
|Processing facilities                        |  |             | 3,383  |            |  |            | 3,304  |  |  |   | 3,192  | 
|Voiseys Bay project                         |  |             | 3,817  |            |  |            | 3,338  |  |  |   | 5,532  | 
|Goro project                                 |  |             | 802    |            |  |            | 637    |  |  |   | 180    | 
|Other                                        |  |             | 598    |            |  |            | 595    |  |  |   | 604    | 
|                                             |  |             |        |            |  |            |        |  |  |   |        | 
|Total property, plant and equipment, at cost |  |             | 11,502 |            |  |            | 10,680 |  |  |   | 12,254 | 
|                                             |  |             |        |            |  |            |        |  |  |   |        | 
|Accumulated depreciation                     |  |             | 3,277  |            |  |            | 3,111  |  |  |   | 2,888  | 
|Accumulated depletion                        |  |             | 1,249  |            |  |            | 1,187  |  |  |   | 1,106  | 
|                                             |  |             |        |            |  |            |        |  |  |   |        | 
|Total accumulated depreciation and depletion |  |             | 4,526  |            |  |            | 4,298  |  |  |   | 3,994  | 
|                                             |  |             |        |            |  |            |        |  |  |   |        | 
|Property, plant and equipment, net           |  | $           | 6,976  |            |  | $          | 6,382  |  |  | $ | 8,260  | 
|                                             |  |             |        |            |  |            |        |  |  |   |        | 

Evaluation of the future cash flows from major
development projects such as the Voiseys Bay and Goro
projects entails a number of assumptions regarding project
scope, the timing, receipt and terms of regulatory approvals,
estimates of future metals prices, estimates of the ultimate
size of the deposits, ore grades and recoverability, timing of
commercial production, commercial viability of new technological
processes, production volumes, operating and capital costs, and
foreign currency exchange rates. Inherent in these assumptions
are significant risks and uncertainties.

At December 31, 2003, property, plant and
equipment, at cost included capitalized development costs
relating to infill drilling, gathering geological and
geotechnical data, further reserve and other mineralized
material evaluation and other related activities of
$27 million (2002  $22 million;
2001  $89 million). In 2002, such costs in the
amount of $71 million were written off as a result of the
review of the carrying value of the Voiseys Bay project
and certain other assets discussed in Note 4.

Effective January 1, 2004, we will adopt for
Canadian GAAP purposes the depreciation and depletion method
described in Note 23(b) for United States GAAP purposes. We
are evaluating what impact this change will have on our 2004
consolidated financial statements and whether we are able to
retroactively apply this change although applicable
pronouncements indicate that it is to be applied prospectively.
Had this method been applied beginning January 1, 2002, net
earnings for 2003 and 2002 would have increased by
$16 million and $5 million, respectively.

At December 31, 2003, the net carrying value
of property, plant and equipment under construction or
development not subject to depreciation or depletion was
$4,720 million (2002  $4,109 million;
2001  $5,761 million) which is comprised of
amounts for the Voiseys Bay project totalling
$3,777 million (2002  $3,299 million;
2001  $5,492 million), the Goro project of
$802 million (2002  $637 million;
2001  $180 million) and other assets under
construction at our operations of $141 million
(2002  $173 million; 2001 
$89 million). It is currently expected, assuming that a
favourable decision will be made in 2004 to proceed with the
Goro project, that depreciation and depletion for the
Voiseys Bay and Goro projects will commence in 2006, in
line with the projected or planned start of commercial
production at these projects. Capitalized interest costs
included in capital expenditures were $54 million in 2003
(2002  $27 million; 2001 
$13 million).

163



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


Note 11. Long-term debt

Long-term debt consisted of the following
(weighted-average interest rates, where applicable, and
repayment periods at December 31, 2003 are shown in
parentheses):

|                                                       |  |             |       |      |  |      |       |  |  |   |     | 
|------------------------------------------------------ |  | ----------- | ----- | ---- |  | ---- | ----- |  |  | - | --- | 
|                                                       |  |            
|                                                       |  | December 31
|                                                       |  |            
|                                                       |  | 2003        |       | 2002 |  | 2001
|                                                       |  |             |       |      |  |     
|Inco Limited                                           |  |             |       |      |  |      |       |  |  |   |     | 
|5.75% Convertible Debentures(a)                        |  | $           |      |      |  | $    | 173   |  |  | $ | 173 | 
|15.75% Sterling Unsecured Loan Stock
    (2006)(b)     |  |             | 45    |      |  |      | 45    |  |  |   | 45  | 
|7.75% Notes (2012)(c)                                  |  |             | 400   |      |  |      | 400   |  |  |   |    | 
|5.70% Debentures (2015)(d)                             |  |             | 300   |      |  |      |      |  |  |   |    | 
|7.75% Convertible Debentures(e)                        |  |             |      |      |  |      | 151   |  |  |   | 160 | 
|9.6% Debentures(f)                                     |  |             |      |      |  |      | 159   |  |  |   | 159 | 
|Convertible Debentures (2004-2023)(g)                  |  |             | 15    |      |  |      |      |  |  |   |    | 
|7.20% Debentures (2032)(h)                             |  |             | 400   |      |  |      | 400   |  |  |   |    | 
|Subordinated Convertible Debentures
    (2004-2052)(i) |  |             | 100   |      |  |      |      |  |  |   |    | 
|PT International Nickel Indonesia
    Tbk              |  |             |       |      |  |      |       |  |  |   |     | 
|Loan facilities (2.3%) (2004 
    2006)(j)            |  |             | 192   |      |  |      | 269   |  |  |   | 292 | 
|Other                                                  |  |             |       |      |  |      |       |  |  |   |     | 
|Other (7.6%) (2004  2031)                             |  |             | 60    |      |  |      | 46    |  |  |   | 11  | 
|                                                       |  |             |       |      |  |      |       |  |  |   |     | 
|                                                       |  |             | 1,512 |      |  |      | 1,643 |  |  |   | 840 | 
|Long-term debt due within one year                     |  |             | 103   |      |  |      | 97    |  |  |   | 81  | 
|                                                       |  |             |       |      |  |      |       |  |  |   |     | 
|                                                       |  | $           | 1,409 |      |  | $    | 1,546 |  |  | $ | 759 | 
|                                                       |  |             |       |      |  |      |       |  |  |   |     | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The 5.75 per cent Convertible Debentures were
    convertible, at the option of the holders, into Common Shares,
    at a conversion price of U.S.$30 per share. The Debentures were
    redeemable, at our option, commencing in 1999 at an initial
    premium of 2.875 per cent, declining annually to redemption at
    par in 2004. The Debentures were redeemed in May 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(b) | The 15.75 per cent Sterling Unsecured Loan Stock
    is redeemable in 2006 in sterling or, at the option of the
    holders, in U.S. dollars at a fixed exchange rate of one pound
    sterling to $1.98. In 1981, Inco Limited issued Pound Sterling
    25 million aggregate principal amount of unsecured bonds
    which were called unsecured loan stock in the United
    Kingdom. These bonds were issued under a Trust Deed which
    contained many of the same provisions that are included in a
    trust indenture covering the issuance of unsecured bonds in the
    United States. These bonds rank equally and ratably with all of
    Incos other unsecured and unsubordinated debt. Holders of
    these debt securities were defined as bondholders under the
    Trust Deed. Under United Kingdom law, unsecured loan stock
    represent an unsecured bond issued in bearer form.
|(c) | On May 13, 2002, we issued and sold through
    an underwritten public offering in the United States
    $400 million aggregate principal amount of 7.75% Notes due
    2012. The Notes are redeemable, at our option, at any time at a
    price equal to the greater of the principal amount of the Notes
    and the sum of the present values of the remaining scheduled
    payments of principal and interest. The interest payments under
    the Notes were swapped in exchange for a floating rate of 3.25
    per cent over LIBOR.                                                                                                                                                                                                                                                                                                                                                             
|(d) | On September 26, 2003, we issued and sold
    through an underwritten public offering in the United States
    $300 million aggregate principal amount of our 5.70%
    Debentures due 2015. The Debentures are redeemable, at our
    option, at any time at a price equal to the greater of the
    principal amount of the Notes and the sum of the present values
    of the remaining scheduled payments of principal and interest.
    The interest payments under the Debentures were swapped in
    exchange for a floating rate of 0.57 per cent over LIBOR.                                                                                                                                                                                                                                                                                                                                    
|(e) | The 7.75 per cent Convertible Debentures were
    convertible, at the option of the holders, into Common Shares at
    a conversion price of U.S.$38.25 per share. The Debentures were
    redeemable, at our option, in 1999 at a premium of 1.55 per
    cent, declining annually to redemption at par in 2001 and
    thereafter. The Debentures were redeemed in October 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(f) | The 9.6 per cent Debentures were redeemable, at
    our option, commencing in 2002 at an initial premium of 4.8 per
    cent, declining annually to redemption at par in 2012 and
    thereafter. The interest payments under the Debentures were
    swapped in exchange for a floating rate of 3.05 per cent over
    LIBOR. The swap was cancelled in May 2003 and the Debentures
    were subsequently redeemed in October 2003.

|    |                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(g) | In March 2003, we issued and sold
    $273 million amount payable at maturity of Convertible
    Debentures due 2023. Reference is made to Note 14 for the
    details of the Convertible Debentures.

164



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(h) | On September 23, 2002, we issued and sold
    through an underwritten public offering in the United States
    $400 million aggregate principal amount of 7.20% Debentures
    due 2032. The Debentures are redeemable, at our option, at any
    time at a price equal to the greater of the principal amount of
    the Debentures and the sum of the present values of the
    remaining scheduled payments of principal and interest.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | In March 2003, we issued and sold
    $227 million aggregate principal amount of 3 1/2%
    Subordinated Convertible Debentures due 2052. Reference is made
    to Note 14 for the details of the Subordinated Debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(j) | Our 59 per cent-owned subsidiary, PT
    International Nickel Indonesia Tbk (PT Inco), had
    outstanding at December 31, 2003 loan facilities
    aggregating $192 million consisting of a $131 million
    expansion loan (2002  $183 million;
    2001  $236 million); a $31 million loan
    (2002  $44 million; 2001 
    $56 million) and a $30 million loan (2002 
    $42 million; 2001  $nil million). All loans
    under the loan facilities are repayable in 13 equal
    semi-annual instalments commencing March 31, 2000. The
    expansion loan and the $31 million loan bear interest, when
    drawn, at 7/8 per cent over LIBOR in the first five years and
    one per cent over LIBOR in the last five years. The
    $30 million loan bears interest at 1 1/2 per cent over
    LIBOR. As security for these loans, PT Inco has assigned and
    pledged certain of its cash and cash equivalents, sales
    agreements, service agreements and insurance policies.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(k) | We maintain committed bank credit facilities
    aggregating $680 million. These facilities are provided by
    a group of banks under separate agreements, the terms of each
    agreement being substantially the same. Except for four
    facilities totalling $145 million in commitments, the
    facilities include revolving commitments from 364 days to
    four years. The four facilities totalling $145 million in
    commitments have only revolving periods, which expire either in
    June 2005, June 2006 or June 2007. The respective revolving
    period of all of the facilities may be extended for an
    additional 364-day period at the discretion of the respective
    bank under the particular facility, subject to the approval of
    lenders representing, in the aggregate, at least 66 2/3 per
    cent of the total aggregate commitments under the facilities,
    and any amounts outstanding at the maturity of the revolving
    period are repayable at that time. The revolving periods for the
    facilities currently expire on dates ranging from June 1,
    2004 to June 4, 2007, with $273 million of these
    facilities expiring on June 1, 2004.

Each facility provides that, so long as advances
are outstanding, we will be required to maintain a Tangible Net
Worth, as defined in the facility agreements, of not less than
$1.5 billion and a ratio of Consolidated Indebtedness, as
defined, to Tangible Net Worth, as defined in the facility
agreements, not to exceed 50:50. At December 31, 2003,
Tangible Net Worth was $3.8 billion and the ratio of
Consolidated Indebtedness to Tangible Net Worth was 26:74.

Interest expense on long-term debt for the years
2003, 2002 and 2001 was $36 million, $46 million and
$54 million, respectively. Taking into account the
aforementioned interest rate swaps, the average effective
interest rate on long-term debt at December 31, 2003 was
5.1 per cent and approximately 61 per cent of long-term
debt bears interest at rates that are subject to periodic
adjustments based on market interest rates. Approximately
97 per cent of long-term debt is effectively payable in
U.S. dollars.

At December 31, 2003, long-term debt
maturities and sinking fund requirements for each of the
five years through 2008 were: 2004 
$103 million; 2005  $87 million;
2006  $90 million; 2007 
$4 million; 2008  $4 million.

Note 12. Post-retirement
benefits

Our pension plans cover essentially all employees
and provide certain health care and life insurance benefits for
retired employees.

165



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


The change in the funded status of
post-retirement defined benefit plans was as follows:

|                                                                  |  |                  |       |                          |  |      |       |      |  |      |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|----------------------------------------------------------------- |  | ---------------- | ----- | ------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                                                  |  |                  |       |                          |  |      |       |     
|                                                                  |  |                  |       | Post-retirement benefits
|                                                                  |  | Pension benefits |       | other than pensions     
|                                                                  |  |                  |       |                         
|Year ended December 31                                            |  | 2003             |       | 2002                     |  | 2001 |       | 2003 |  | 2002 |       | 2001
|                                                                  |  |                  |       |                          |  |      |       |      |  |      |       |     
|Change in post-retirement benefits
    obligation                 |  |                  |       |                          |  |      |       |      |  |      |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|Obligation at beginning of year                                   |  | $                | 2,172 |                          |  | $    | 2,031 |      |  | $    | 2,101 |      |  | $ | 677  |   |  | $ | 581  |   |  | $ | 561  |  
|Service cost                                                      |  |                  | 33    |                          |  |      | 27    |      |  |      | 27    |      |  |   | 10   |   |  |   | 6    |   |  |   | 6    |  
|Interest cost                                                     |  |                  | 153   |                          |  |      | 140   |      |  |      | 138   |      |  |   | 49   |   |  |   | 41   |   |  |   | 39   |  
|Plan amendments                                                   |  |                  | 20    |                          |  |      | 10    |      |  |      |      |      |  |   |     |   |  |   |     |   |  |   |     |  
|Changes in assumptions                                            |  |                  | 73    |                          |  |      | 69    |      |  |      |      |      |  |   | 36   |   |  |   | 68   |   |  |   | 29   |  
|Actuarial losses                                                  |  |                  | 1     |                          |  |      | 18    |      |  |      | 28    |      |  |   | 11   |   |  |   | 9    |   |  |   | 10   |  
|Benefits paid                                                     |  |                  | (184  | )                        |  |      | (150  | )    |  |      | (142  | )    |  |   | (38  | ) |  |   | (32  | ) |  |   | (31  | )
|Currency translation adjustments                                  |  |                  | 466   |                          |  |      | 27    |      |  |      | (121  | )    |  |   | 149  |   |  |   | 4    |   |  |   | (33  | )
|                                                                  |  |                  |       |                          |  |      |       |      |  |      |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|Obligation at end of year                                         |  | $                | 2,734 |                          |  | $    | 2,172 |      |  | $    | 2,031 |      |  | $ | 894  |   |  | $ | 677  |   |  | $ | 581  |  
|                                                                  |  |                  |       |                          |  |      |       |      |  |      |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|Change in pension plan assets                                     |  |                  |       |                          |  |      |       |      |  |      |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|Fair value of plan assets at beginning of year                    |  | $                | 1,367 |                          |  | $    | 1,507 |      |  | $    | 1,731 |      |  |   |      |   |  |   |      |   |  |   |      |  
|Actual return on plan assets                                      |  |                  | 231   |                          |  |      | (91   | )    |  |      | (54   | )    |  |   |      |   |  |   |      |   |  |   |      |  
|Employer contributions                                            |  |                  | 142   |                          |  |      | 67    |      |  |      | 60    |      |  |   |      |   |  |   |      |   |  |   |      |  
|Benefits paid                                                     |  |                  | (165  | )                        |  |      | (138  | )    |  |      | (136  | )    |  |   |      |   |  |   |      |   |  |   |      |  
|Currency translation adjustments                                  |  |                  | 282   |                          |  |      | 22    |      |  |      | (94   | )    |  |   |      |   |  |   |      |   |  |   |      |  
|                                                                  |  |                  |       |                          |  |      |       |      |  |      |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|Fair value of plan assets at end of year                          |  | $                | 1,857 |                          |  | $    | 1,367 |      |  | $    | 1,507 |      |  |   |      |   |  |   |      |   |  |   |      |  
|                                                                  |  |                  |       |                          |  |      |       |      |  |      |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|Unfunded status of plans at end of year                           |  | $                | (877  | )                        |  | $    | (805  | )    |  | $    | (524  | )    |  | $ | (894 | ) |  | $ | (677 | ) |  | $ | (581 | )
|Unrecognized actuarial and investment losses                      |  |                  | 1,007 |                          |  |      | 864   |      |  |      | 562   |      |  |   | 252  |   |  |   | 173  |   |  |   | 101  |  
|Unrecognized prior service costs                                  |  |                  | 84    |                          |  |      | 67    |      |  |      | 70    |      |  |   |     |   |  |   |     |   |  |   |     |  
|                                                                  |  |                  |       |                          |  |      |       |      |  |      |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|Net post-retirement benefits asset
    (liability) at end of year |  | $                | 214   |                          |  | $    | 126   |      |  | $    | 108   |      |  | $ | (642 | ) |  | $ | (504 | ) |  | $ | (480 | )
|                                                                  |  |                  |       |                          |  |      |       |      |  |      |       |      |  |   |      |   |  |   |      |   |  |   |      |  

The net post-retirement benefits asset
(liability) is reflected in the Consolidated Balance Sheet
as follows:

|                                               |  |                  |     |                          |  |      |     |      |  |      |     |      |  |   |      |   |  |   |      |   |  |   |      |  
|---------------------------------------------- |  | ---------------- | --- | ------------------------ |  | ---- | --- | ---- |  | ---- | --- | ---- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                               |  |                  |     |                          |  |      |     |     
|                                               |  |                  |     | Post-retirement benefits
|                                               |  | Pension benefits |     | other than pensions     
|                                               |  |                  |     |                         
|December 31                                    |  | 2003             |     | 2002                     |  | 2001 |     | 2003 |  | 2002 |     | 2001
|                                               |  |                  |     |                          |  |      |     |      |  |      |     |     
|Deferred charges and other assets              |  | $                | 226 |                          |  | $    | 138 |      |  | $    | 120 |      |  | $ |     |   |  | $ |     |   |  | $ |     |  
|Accrued payrolls and benefits                  |  |                  | (12 | )                        |  |      | (12 | )    |  |      | (12 | )    |  |   | (39  | ) |  |   | (29  | ) |  |   | (29  | )
|Post-retirement benefits                       |  |                  |    |                          |  |      |    |      |  |      |    |      |  |   | (603 | ) |  |   | (475 | ) |  |   | (451 | )
|                                               |  |                  |     |                          |  |      |     |      |  |      |     |      |  |   |      |   |  |   |      |   |  |   |      |  
|Net post-retirement benefits asset (liability) |  | $                | 214 |                          |  | $    | 126 |      |  | $    | 108 |      |  | $ | (642 | ) |  | $ | (504 | ) |  | $ | (480 | )
|                                               |  |                  |     |                          |  |      |     |      |  |      |     |      |  |   |      |   |  |   |      |   |  |   |      |  

166



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


Post-retirement benefits expense included the
following components:

|                                                                                     |  |                  |      |                     |  |      |      |                 |  |      |      |      |  |   |    |  |  |   |    |  |  |   |    | 
|------------------------------------------------------------------------------------ |  | ---------------- | ---- | ------------------- |  | ---- | ---- | --------------- |  | ---- | ---- | ---- |  | - | -- |  |  | - | -- |  |  | - | -- | 
|                                                                                     |  |                  |      |                     |  |      |      |                
|                                                                                     |  |                  |      |                     |  |      |      | Post-retirement
|                                                                                     |  |                  |      | benefits other than
|                                                                                     |  | Pension benefits |      | pensions           
|                                                                                     |  |                  |      |                    
|Year ended December 31                                                               |  | 2003             |      | 2002                |  | 2001 |      | 2003            |  | 2002 |      | 2001
|                                                                                     |  |                  |      |                     |  |      |      |                 |  |      |      |     
|Service cost                                                                         |  | $                | 33   |                     |  | $    | 27   |                 |  | $    | 27   |      |  | $ | 10 |  |  | $ | 6  |  |  | $ | 6  | 
|Interest cost                                                                        |  |                  | 153  |                     |  |      | 140  |                 |  |      | 138  |      |  |   | 49 |  |  |   | 41 |  |  |   | 39 | 
|Expected return on plan assets                                                       |  |                  | (162 | )                   |  |      | (152 | )               |  |      | (150 | )    |  |   |   |  |  |   |   |  |  |   |   | 
|Amortization of actuarial and investment losses                                      |  |                  | 62   |                     |  |      | 35   |                 |  |      | 17   |      |  |   | 11 |  |  |   | 6  |  |  |   | 4  | 
|Amortization of unrecognized prior service costs                                     |  |                  | 16   |                     |  |      | 13   |                 |  |      | 18   |      |  |   |   |  |  |   |   |  |  |   |   | 
|                                                                                     |  |                  |      |                     |  |      |      |                 |  |      |      |      |  |   |    |  |  |   |    |  |  |   |    | 
|Defined benefit pension and post-retirement
    benefits other than pensions expense |  |                  | 102  |                     |  |      | 63   |                 |  |      | 50   |      |  |   | 70 |  |  |   | 53 |  |  |   | 49 | 
|Defined contribution pension expense                                                 |  |                  | 5    |                     |  |      | 4    |                 |  |      | 4    |      |  |   |   |  |  |   |   |  |  |   |   | 
|                                                                                     |  |                  |      |                     |  |      |      |                 |  |      |      |      |  |   |    |  |  |   |    |  |  |   |    | 
|Post-retirement benefits expense                                                     |  | $                | 107  |                     |  | $    | 67   |                 |  | $    | 54   |      |  | $ | 70 |  |  | $ | 53 |  |  | $ | 49 | 
|                                                                                     |  |                  |      |                     |  |      |      |                 |  |      |      |      |  |   |    |  |  |   |    |  |  |   |    | 

The weighted-average assumptions used in the
determination of the post-retirement benefits expense and
obligation were as follows:

|                               |  |                  |     |                     |  |      |     |                 |  |      |     |      |  |  |     |   |  |  |     |   |  |  |     |  
|------------------------------ |  | ---------------- | --- | ------------------- |  | ---- | --- | --------------- |  | ---- | --- | ---- |  |  | --- | - |  |  | --- | - |  |  | --- | -
|                               |  |                  |     |                     |  |      |     |                
|                               |  |                  |     |                     |  |      |     | Post-retirement
|                               |  |                  |     | benefits other than
|                               |  | Pension benefits |     | pensions           
|                               |  |                  |     |                    
|Year ended December 31         |  | 2003             |     | 2002                |  | 2001 |     | 2003            |  | 2002 |     | 2001
|                               |  |                  |     |                     |  |      |     |                 |  |      |     |     
|Discount rate                  |  |                  | 6.5 | %                   |  |      | 7.0 | %               |  |      | 7.0 | %    |  |  | 6.5 | % |  |  | 7.0 | % |  |  | 7.0 | %
|Expected return on plan assets |  |                  | 8.5 | %                   |  |      | 9.0 | %               |  |      | 9.0 | %    |  |  |     |   |  |  |     |   |  |  |     |  
|Rate of compensation increase  |  |                  | 3.0 | %                   |  |      | 3.0 | %               |  |      | 3.0 | %    |  |  |     |   |  |  |     |   |  |  |     |  

Effective December 31, 2003, the assumption
for the discount rate used to determine the pension benefits
obligation was changed to 6 per cent. Effective January 1,
2004, the assumption for the expected return on plan assets was
changed to 8 per cent.

The pension plan weighted-average asset
allocations, by asset category were as follows:

|                  |  |             |     |      |  |      |     |   |  |  |     |  
|----------------- |  | ----------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                  |  |            
|                  |  | December 31
|                  |  |            
|                  |  | 2003        |     | 2002 |  | 2001
|                  |  |             |     |      |  |     
|Equity securities |  |             | 57  | %    |  |      | 55  | % |  |  | 56  | %
|Debt securities   |  |             | 43  | %    |  |      | 45  | % |  |  | 44  | %
|                  |  |             |     |      |  |      |     |   |  |  |     |  
|Total             |  |             | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                  |  |             |     |      |  |      |     |   |  |  |     |  

The asset allocation policy for the plans is 40%
fixed income and 60% equities for most of the significant
pension plans, with the exception of the United Kingdom pension
plan which has a policy mix of 50% fixed income and 50%
equities. The actual asset mix is maintained fairly close to the
policy mix at most times by the use of a rigorous rebalancing
policy.

Equity securities include Inco Limited common
shares in the amount of $7 million (2002 
$5 million, 2001  $4 million).

The return on assets assumption has been based on
an estimate of the future long-term average return that can
reasonably be earned on the assets of the pension fund. The
starting point for the calculation of this assumption is the
current yield obtainable from the fixed income portion of the
portfolio. The yield available on the benchmark used, the Scotia
Capital Universe Bond Index (50% of the bond component) and the
Scotia Capital Long Bond Index (the remainder of the bond
component), is used as the expected return on the bond

167



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


indices since, in our view, this represents the
best estimate of long-term future returns for the bond
portfolio. Equity investments are assumed in aggregate to have
an expected long-term future return of 3% in excess of the yield
available on long-term Government of Canada bonds; for 2002 and
2003, the 10 Year+ index was used and for 2004, the 10-Year
benchmark bond yield was used (this change reflects the
marketplace change and significant lack of issuance for
30 year maturities). For the portion of the assets that are
invested in actively managed investment managers, an additional
return expectation is included to recognize each managers
target anticipated long-term value added above the index return.
We note that actual added value over the past periods has been
substantially in excess of this amount. The weighted average of
the returns determined for each portion of the fund becomes the
return on assets assumption (rounded to the next lower 50 basis
points).

The composite health care cost trend rate used in
measuring post-retirement benefits other than pensions was
assumed to begin at 8 per cent, gradually declining to 5 per
cent by 2007 and remaining at that level thereafter.

The projected pension benefits obligation and
fair value of plan assets for pension plans with accumulated
benefits obligations in excess of plan assets were as follows:

|                              |  |                  |       |      |  |      |       |   |  |   |       |  
|----------------------------- |  | ---------------- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                              |  |                 
|                              |  | Pension benefits
|                              |  |                 
|December 31                   |  | 2003             |       | 2002 |  | 2001
|                              |  |                  |       |      |  |     
|Projected benefits obligation |  | $                | 2,734 |      |  | $    | 2,172 |   |  | $ | 1,940 |  
|Fair value of plan assets     |  |                  | 1,857 |      |  |      | 1,367 |   |  |   | 1,415 |  
|                              |  |                  |       |      |  |      |       |   |  |   |       |  
|Unfunded status               |  | $                | (877  | )    |  | $    | (805  | ) |  | $ | (525  | )
|                              |  |                  |       |      |  |      |       |   |  |   |       |  

A one per cent change in the assumed composite
health care cost trend rate would have the following effects:

|                                          |  |                          |     |             |  |   |      |  
|----------------------------------------- |  | ------------------------ | --- | ----------- |  | - | ---- | -
|                                          |  |                         
|                                          |  | Post-retirement benefits
|                                          |  | other than pensions     
|                                          |  |                         
|                                          |  | 1% Increase              |     | 1% Decrease
|                                          |  |                          |     |            
|Effect on accumulated benefits obligation |  | $                        | 101 |             |  | $ | (125 | )
|Effect on net periodic expense            |  |                          | 8   |             |  |   | (9   | )

Note 13. Asset retirement
obligation

The estimation of asset retirement obligation
costs depends on the development of environmentally acceptable
closure and post-closure plans, which, in some cases, may
require significant research and development to identify
preferred methods for such plans which are economically sound
and which, in many cases, may not be implemented for several
decades. We have continued to utilize appropriate technical
resources, including outside consultants, to develop specific
site closure and post-closure plans in accordance with the
requirements of the various jurisdictions in which we operate.
Typical closure and progressive rehabilitation activities
include, where applicable, demolition of buildings, removal of
underground equipment, sealing of mine openings, treatment to
reduce or prevent acid generation from stockpiled waste
materials such as tailings, general clean-up activities aimed at
returning the area to an environmentally acceptable condition,
and post-closure care and maintenance.

In accordance with environmental regulations
adopted by the Province of Ontario in 1991, we developed
rehabilitation and site restoration plans associated with the
eventual closure of our operations in that province. Three
closure plans were filed by the end of 1997, having previously
received approval from the Province of Ontario for the
consolidation of our operating mines and properties in that
province into 15 sites for purposes of closure plans, and
the remaining 12 closure plans were filed by the end of 1998. As
a result of provincial regulatory changes which became effective
in 2000, the plans were refiled to meet these changes in 2001.
We have continued to develop future tailings disposal and water
management alternatives to accommodate up to approximately
40 years of future production. We believe that
cost-effective tailings disposal alternatives exist

168



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


within the ongoing operating activities of the
Sudbury operations which would limit site restoration at closure
to a care and maintenance activity, thus significantly reducing
the costs of such site restoration.

In accordance with environmental regulations
adopted by the Province of Manitoba in 1999, we have developed
reclamation plans associated with the eventual closure of
operations in that province. The Province of Manitoba has
accepted the closure plans for all of our operations in the
province.

Closure plans for the proposed mine and mill
facilities were prepared and submitted in 1998 in connection
with the environmental review process of the Voiseys Bay
project in the Province of Newfoundland and Labrador. This plan
is currently being updated and will be completed in 2004.
Closure plans were prepared and submitted in 2001 in connection
with the bankable feasibility study for the Goro project in New
Caledonia.

We follow a policy of progressive rehabilitation
at our Indonesian operations whereby land disturbed by mining
activities is revegetated on an ongoing basis. Based on an
independent feasibility study, the expansion of facilities in
Sorowako meets or surpasses current standards in Indonesia and
Canada for containment of contaminant discharges to air, water
and land.

Closure plans are in the process of being
prepared for the surface facilities in the United States and the
United Kingdom. However, based on currently available
information, there are no required significant site restoration
activities associated with these facilities.

Substantial asset retirement obligations are
incurred on an ongoing basis which will significantly reduce
asset retirement obligation costs that may otherwise be incurred
following the closure of any sites. This progressive
rehabilitation includes tailings management, land reclamation
and revegetation programs, decommissioning and demolition of
plants and buildings, and waste management activities. Operating
costs associated with ongoing environmental and reclamation
programs, including progressive rehabilitation, aggregated
$39 million in 2003, $13 million in 2002 and
$12 million in 2001 and are included in cost of sales and
other operating expenses. Capital expenditures on environmental
projects were $28 million in 2003, $9 million in 2002
and $17 million in 2001.

Although the ultimate amount to be incurred is
uncertain, the total liability for asset retirement obligations
in respect of worldwide operations, to be incurred primarily
after cessation of operations, is estimated to be approximately
$904 million at December 31, 2003 on an undiscounted
basis. The estimate of the total liability for asset retirement
obligations has been developed from independent environmental
studies including an evaluation of, among other factors,
currently available information with respect to closure plans
and closure alternatives, the anticipated method and extent of
site restoration using current costs and existing technology,
and compliance with presently enacted laws, regulations and
existing industry standards. The total liability represents
estimated expenditures associated with closure, progressive
rehabilitation and post-closure care and maintenance. Potential
recoveries of funds from the future sale of assets upon the
ultimate closure of operations have not been reflected in the
estimate of the total liability or related annual provision.

Effective January 1, 2003, we adopted a new
accounting standard of the CICA relating to asset retirement
obligations. This standard significantly changed the method of
accounting for asset retirement obligations and prior period
financial statements have been restated to reflect this change.
Under the new standard, the asset retirement obligations are
recognized when incurred and recorded as liabilities at fair
value assuming a credit-adjusted risk-free rate of approximately
5.5 per cent on average. Due to the nature of our closure
plans, the timing of such cash expenditures is expected to occur
over a significant period of time being from one year for plans
which are already in progress and over 100 years for the
longest plan. The liability is accreted over time through
periodic charges to cost of sales and other operating expenses.
In addition, the asset retirement cost is capitalized

169



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


as part of the assets carrying value and
depreciated over the assets useful life. The following
table shows the movement in the liability for asset retirement
obligations:

|                                  |  |                        |     |      |  |      |     |   |  |  |     |  
|--------------------------------- |  | ---------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                  |  |                       
|                                  |  | Year ended December 31
|                                  |  |                       
|                                  |  | 2003                   |     | 2002 |  | 2001
|                                  |  |                        |     |      |  |     
|Obligation at beginning of year   |  |                        | 119 |      |  |      | 121 |   |  |  | 124 |  
|Accretion expense                 |  |                        | 6   |      |  |      | 5   |   |  |  | 5   |  
|Liabilities settled               |  |                        | (6  | )    |  |      | (7  | ) |  |  | (8  | )
|Revisions in estimated cash flows |  |                        | 22  |      |  |      |    |   |  |  |    |  
|                                  |  |                        |     |      |  |      |     |   |  |  |     |  
|Obligation at end of year         |  |                        | 141 |      |  |      | 119 |   |  |  | 121 |  
|                                  |  |                        |     |      |  |      |     |   |  |  |     |  

As of December 31, 2003, we had outstanding
letters of credit in the amount of $21 million to secure a
portion of our closure costs related to the closure of three
mines in Ontario. These letters of credit have a term of one
year and will automatically renew without any action by either
Inco or the counterparty until the earlier of (i) Inco
having complied with the terms of the certified closure plans or
(ii) funds from such letters of credit being utilized by
the Ontario Ministry of Northern Development and Mines, the
Ministry responsible for overseeing such closure plans, to
perform rehabilitation work if we did not meet the requirements
with respect to such closure plans. We are required to submit
annual updates on changes to the closure plans, including any
decommissioning and rehabilitation work completed during the
previous year.

In view of the uncertainties concerning
environmental remediation, the ultimate cost of asset retirement
obligations could differ materially from the estimated amounts
provided. The estimate of the total liability for asset
retirement obligation costs is subject to change based on
amendments to laws and regulations and as new information
concerning our operations becomes available. Future changes, if
any, to the estimated total liability as a result of amended
requirements, laws, regulations and operating assumptions may be
significant and would be recognized prospectively as a change in
accounting estimate, when applicable. Environmental laws and
regulations are continually evolving in all regions in which we
operate. We are not able to determine the impact, if any, of
environmental laws and regulations that may be enacted in the
future on our results of operations or financial position due to
the uncertainty surrounding the ultimate form that such future
laws and regulations may take.



|         |                 
|-------- | ----------------
|Note 14. | Convertible debt

On March 29, 2001, we issued and sold, on a
bought deal basis, zero-coupon convertible notes
(LYON Notes), representing an aggregate amount
payable at maturity of $438 million, which are due and
payable March 29, 2021, for net cash proceeds of
$226 million. No interest is payable on the LYON Notes
prior to maturity except in connection with any term or
condition where the holder receives the then accreted value of
the LYON Notes.

The LYON Notes are convertible, at the option of
the holder, at any time on or prior to their maturity date into
Common Shares at a fixed conversion rate of 26.5530 Common
Shares per LYON Note, representing an initial conversion price
of $19.76 per share, with such conversion rate and price
being subject to certain anti-dilution adjustment provisions.
Holders of LYON Notes also have a special conversion right,
exercisable on March 29 in 2007, 2011 and 2016, giving such
holders the right to convert the then accreted value of their
LYON Notes into Common Shares based upon the then market
price for such shares. The LYON Notes are also subject to
redemption at our option on or after March 29, 2007 at
their then accreted value.

We have the right, subject to certain conditions,
in connection with the exercise by a holder of such conversion
or special conversion rights, to pay such holders cash, in whole
or in part, in lieu of Common Shares. We also have the right,
subject to certain conditions, in connection with any redemption
or certain purchases of the LYON Notes, to pay the redemption or
purchase price in Common Shares, based upon the then market price

170



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


thereof, or in cash or any combination of Common
Shares and cash. We are required to offer to purchase the LYON
Notes if there is a change in control of Inco, as defined in the
Trust Indenture dated as of March 29, 2001 between
Inco and The Bank of New York, as Trustee, occurring before
March 29, 2007.

The LYON Notes accrete over the 20-year term of
the LYON Notes to their value at maturity through periodic
after-tax charges to retained earnings. The LYON Notes are not
dilutive for purposes of calculating diluted earnings per share
based on our right to and current intention that we will
eventually meet the redemption and conversion terms of these
Notes in cash.

In March 2003, we issued and sold in concurrent
private offerings (i) $273 million amount payable at
maturity of Convertible Debentures due March 14, 2023
(Convertible Debentures), representing
$249 million in gross proceeds to us, and
(ii) $227 million aggregate principal amount of
Subordinated Convertible Debentures due March 14, 2052
(Subordinated Convertible Debentures). The total
combined gross proceeds were $476 million from these two
issues of convertible debt securities and the net cash proceeds
were $470 million after deduction of commissions and other
after-tax expenses. The Convertible Debentures and Subordinated
Convertible Debentures pay a cash coupon of 3.5 per cent
and 1.0943 per cent, respectively.

The Convertible Debentures and the Subordinated
Convertible Debentures are convertible at the option of the
holders into Common Shares at the conversion rates referred to
below, subject to certain anti-dilution adjustment provisions,
only in the following circumstances: (i) if our Common
Share price, calculated over a specified period, has exceeded
120% of the effective conversion price of the Convertible
Debentures or the Subordinated Convertible Debentures, as
applicable; (ii) if the trading price of the Convertible
Debentures or the Subordinated Convertible Debentures, as
applicable, over a specified period has fallen below 95 per
cent of the amount equal to our then prevailing Common Share
price times the applicable conversion rate; (iii) if we
were to call the Convertible Debentures or the Subordinated
Convertible Debentures, as applicable, for redemption; or
(iv) if certain specified corporate events were to occur.
Each Convertible Debenture will be convertible into
31.9354 Common Shares, representing an initial conversion
price of approximately $28.61 per Common Share, and each
Subordinated Convertible Debenture will be convertible into
38.4423 Common Shares, representing a conversion price of
approximately $26.01 per Common Share.

Holders of the Convertible Debentures have the
right to have us redeem these Debentures at their issue price
plus accrued interest on March 14 in each of 2010, 2014 and
2018. We have the right to redeem the Convertible Debentures at
any time on or after March 19, 2010. We have the right to
redeem the Subordinated Convertible Debentures on or after
March 19, 2008 if our Common Shares trade over a specified
period above 125 per cent of the conversion price for these
securities. Holders of the Subordinated Convertible Debentures
have no right to require us to redeem these subordinated
securities. In meeting the conversion, redemption, payment at
maturity and other related terms of these convertible debt
securities, we have the right, at our option, to satisfy these
obligations in cash, Common Shares or any combination thereof.

In the case of the Convertible Debentures, these
securities rank equally and rateably with all of our existing
and future unsecured and unsubordinated indebtedness. The
Subordinated Convertible Debentures are subordinated to all of
our senior indebtedness, which includes, among other
obligations, all of our existing and future unsecured and
unsubordinated indebtedness.

For Canadian reporting purposes, these
convertible debt securities were initially recorded as
$114 million of debt and $356 million of equity. The
portion recorded as debt represents the present value of the
cash coupons discounted as at the date of issuance.

171



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


Changes in the convertible debt were as follows:

|                              |  |       |     |             |  |              |     |       |  |   |     |  |  |   |     | 
|----------------------------- |  | ----- | --- | ----------- |  | ------------ | --- | ----- |  | - | --- |  |  | - | --- | 
|                              |  |       |     |             |  | Subordinated |     |      
|                              |  | LYON  |     | Convertible |  | Convertible  |     |      
|                              |  | Notes |     | Debentures  |  | Debentures   |     | Total
|                              |  |       |     |             |  |              |     |      
|December 31, 2000             |  | $     |    |             |  | $            |    |       |  | $ |    |  |  | $ |    | 
|Convertible debt issued       |  |       | 226 |             |  |              |    |       |  |   |    |  |  |   | 226 | 
|Accretion of convertible debt |  |       | 5   |             |  |              |    |       |  |   |    |  |  |   | 5   | 
|                              |  |       |     |             |  |              |     |       |  |   |     |  |  |   |     | 
|December 31, 2001             |  |       | 231 |             |  |              |    |       |  |   |    |  |  |   | 231 | 
|Accretion of convertible debt |  |       | 7   |             |  |              |    |       |  |   |    |  |  |   | 7   | 
|                              |  |       |     |             |  |              |     |       |  |   |     |  |  |   |     | 
|December 31, 2002             |  |       | 238 |             |  |              |    |       |  |   |    |  |  |   | 238 | 
|Convertible debt issued       |  |       |    |             |  |              | 230 |       |  |   | 126 |  |  |   | 356 | 
|Accretion of convertible debt |  |       | 9   |             |  |              | 3   |       |  |   |    |  |  |   | 12  | 
|                              |  |       |     |             |  |              |     |       |  |   |     |  |  |   |     | 
|December 31, 2003             |  | $     | 247 |             |  | $            | 233 |       |  | $ | 126 |  |  | $ | 606 | 
|                              |  |       |     |             |  |              |     |       |  |   |     |  |  |   |     | 



|         |                 
|-------- | ----------------
|Note 15. | Preferred Shares

We are authorized to issue 45,000,000 Preferred
Shares with no par value, which are issuable in series for a
maximum consideration of Cdn.$1.5 billion or its equivalent
in other currencies.



| |                              
| | -----------------------------
| | Preferred Shares
    Series E

On August 21, 1996, we issued 9,424,657
5.5 per cent Convertible Redeemable Preferred Shares
Series E (Preferred Shares Series E), with
an issue price of $50 per share, for an aggregate face
value of $471 million as partial consideration for the
acquisition of Diamond Fields Resources Inc. (Diamond
Fields). The Preferred Shares Series E had an annual
cumulative dividend of 5.5 per cent payable in
U.S. dollars or the equivalent in Canadian dollars. The
Preferred Shares Series E were convertible at any time into
Common Shares at a conversion rate, subject to certain
adjustments in the event of stock splits, stock dividends,
certain exchange or tender offers and certain fundamental
corporate changes, of 1.19474 Common Shares for each
Preferred Share Series E and were redeemable at our option
after five years at an initial premium of 2.75 per cent,
declining annually to 0.55 per cent in 2005, and were
subject to mandatory redemption at the $50 issue price (or the
equivalent in Canadian dollars at the option of the holder),
together with all then accrued and unpaid dividends, on
August 21, 2006. We had the right, subject to certain
exceptions, to satisfy the optional or mandatory redemption
price payable by issuing Common Shares based upon a formula
equivalent to 95 per cent of a weighted-average trading
price for the Common Shares over a 20-day period ending five
days prior to the particular redemption date. The Preferred
Shares Series E had general voting rights on the basis,
subject to certain adjustments in the event of certain
fundamental corporate changes, of one vote per share and
had a separate series vote in the event of certain fundamental
changes which required a series vote under applicable corporate
laws. The Preferred Shares Series E also had a right to
elect two Directors in the event that, and so long as,
cumulative quarterly dividends on the series were in arrears for
six or more quarters. At the date of issue, a beneficial
conversion feature for the Preferred Shares Series E did
not exist because the conversion price to common shares was
above the then current market price.

Contingently issuable equity included Preferred
Shares Series E contingently issuable upon exercise of
stock options held by former employees of Diamond Fields, which
were exercisable through to December 13, 2003. On
April 17, 2003, all remaining outstanding options held by
one holder were exercised and upon exercise the holder received
a combination of 485,471 Common Shares with a value of
$17 million and cash in the amount of $3 million
partially in lieu of the Preferred Shares Series E that had
been called for redemption.

172



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


On March 28, 2003, we announced that we
would exercise our optional right to redeem all of our issued
and outstanding Preferred Shares Series E having a
$472 million aggregate liquidation preference and which
were subject to mandatory redemption in 2006, with such
redemption to be effective May 1, 2003. Pursuant to their
terms, we redeemed the Preferred Shares Series E by paying
the optional redemption price of $51.10 per share plus all
accrued and unpaid dividends to the May 1, 2003 redemption
date. Holders of the Series E Preferred Shares had the
right to convert their shares into Common Shares at a fixed
conversion rate of 1.19474 Common Shares for each Preferred
Share Series E held at any time prior to the May 1,
2003 redemption date. The conversion rate represented an
effective conversion price of $41.85 per Common Share. The
total aggregate redemption price for the Preferred Shares
Series E was $487 million, including a redemption
premium of $11 million based upon the $50 issue price per
Preferred Share Series E and $4 million in accrued
dividends.

Changes in the Preferred Shares Series E
were as follows:

|                                  |  |           |            |        |  |   |      |  
|--------------------------------- |  | --------- | ---------- | ------ |  | - | ---- | -
|                                  |  | Number of |            |       
|                                  |  | shares    |            | Amount
|                                  |  |           |            |       
|December 31, 2000                 |  |           | 9,439,725  |        |  | $ | 472  |  
|Shares converted to Common Shares |  |           | (25        | )      |  |   |     |  
|                                  |  |           |            |        |  |   |      |  
|December 31, 2001                 |  |           | 9,439,700  |        |  |   | 472  |  
|Shares converted to Common Shares |  |           | (100       | )      |  |   |     |  
|                                  |  |           |            |        |  |   |      |  
|December 31, 2002                 |  |           | 9,439,600  |        |  |   | 472  |  
|Shares converted to Common Shares |  |           | (1,193     | )      |  |   |     |  
|Shares redeemed                   |  |           | (9,438,407 | )      |  |   | (472 | )
|                                  |  |           |            |        |  |   |      |  
|December 31, 2003                 |  |           |           |        |  | $ |     |  
|                                  |  |           |            |        |  |   |      |  



|         |         
|-------- | --------
|Note 16. | Warrants

On December 14, 2000, we issued warrants
upon the redemption of our Class VBN Shares. Each Common
Share purchase warrant (a Warrant) has an
exercise price, for each whole Warrant, of Cdn.$30.00 (or the
equivalent in U.S. dollars) for the purchase of one Common
Share at any time on or before August 21, 2006. The
exercise price and/or the number and kind of securities issuable
on the exercise of the Warrants are subject to adjustment in
certain events, as set forth in the Warrant Agreement dated as
of December 1, 2000 among Inco, CIBC Mellon Trust Company
and ChaseMellon Shareholder Services LLC, as Canadian and
U.S. Warrant Agents, respectively, covering the issuance of
the Warrants. These adjustments include, among others, certain
changes in our capital structure such as any subdivision or
consolidation of Common Shares, stock dividends or other
distributions, the consolidation, amalgamation or merger of Inco
with another company, or the transfer of all or substantially
all of our assets.

173



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


Changes in the Warrants were as follows:

|                   |  |           |            |        |  |   |    | 
|------------------ |  | --------- | ---------- | ------ |  | - | -- | 
|                   |  | Number of |            |       
|                   |  | warrants  |            | Amount
|                   |  |           |            |       
|December 31, 2000  |  |           | 10,997,903 |        |  | $ | 62 | 
|Warrants issued    |  |           | 26,987     |        |  |   |   | 
|Warrants exercised |  |           | (2,943     | )      |  |   |   | 
|                   |  |           |            |        |  |   |    | 
|December 31, 2001  |  |           | 11,021,947 |        |  |   | 62 | 
|Warrants issued    |  |           | 1,782      |        |  |   |   | 
|Warrants exercised |  |           | (232       | )      |  |   |   | 
|                   |  |           |            |        |  |   |    | 
|December 31, 2002  |  |           | 11,023,497 |        |  |   | 62 | 
|Warrants issued    |  |           | 416        |        |  |   |   | 
|Warrants exercised |  |           | (849       | )      |  |   |   | 
|                   |  |           |            |        |  |   |    | 
|December 31, 2003  |  |           | 11,023,064 |        |  | $ | 62 | 
|                   |  |           |            |        |  |   |    | 



|         |              
|-------- | -------------
|Note 17. | Common shares

We are authorized to issue an unlimited number of
Common Shares without nominal or par value.

Changes in the Common Shares were as follows:

|                                                                        |  |           |             |        |  |   |       | 
|----------------------------------------------------------------------- |  | --------- | ----------- | ------ |  | - | ----- | 
|                                                                        |  | Number of |             |       
|                                                                        |  | shares    |             | Amount
|                                                                        |  |           |             |       
|December 31, 2000                                                       |  |           | 181,807,214 |        |  | $ | 2,751 | 
|Options exercised                                                       |  |           | 367,350     |        |  |   | 5     | 
|Shares issued under incentive plans                                     |  |           | 15,196      |        |  |   |      | 
|Shares issued on conversion of Preferred Shares
    Series E            |  |           | 29          |        |  |   |      | 
|Shares issued on exercise of Warrants                                   |  |           | 2,943       |        |  |   |      | 
|                                                                        |  |           |             |        |  |   |       | 
|December 31, 2001                                                       |  |           | 182,192,732 |        |  |   | 2,756 | 
|Options exercised                                                       |  |           | 1,012,635   |        |  |   | 14    | 
|Shares issued under incentive plans                                     |  |           | 32,633      |        |  |   | 1     | 
|Shares issued on conversion of Preferred Shares
    Series E            |  |           | 119         |        |  |   |      | 
|Shares issued on exercise of Warrants                                   |  |           | 232         |        |  |   |      | 
|                                                                        |  |           |             |        |  |   |       | 
|December 31, 2002                                                       |  |           | 183,238,351 |        |  |   | 2,771 | 
|Options exercised                                                       |  |           | 3,130,556   |        |  |   | 68    | 
|Shares issued under incentive plans                                     |  |           | 40,249      |        |  |   | 1     | 
|Shares issued on conversion of Preferred Shares
    Series E            |  |           | 1,424       |        |  |   |      | 
|Shares issued upon exercise of former Diamond
    Fields stock options |  |           | 485,471     |        |  |   | 17    | 
|Shares issued on conversion of Debentures                               |  |           | 18,965      |        |  |   | 1     | 
|Shares issued on exercise of Warrants                                   |  |           | 849         |        |  |   |      | 
|                                                                        |  |           |             |        |  |   |       | 
|December 31, 2003                                                       |  |           | 186,915,865 |        |  | $ | 2,858 | 
|                                                                        |  |           |             |        |  |   |       | 

Contingently issuable equity included Common
Shares contingently issuable upon exercise of stock options held
by former employees of Diamond Fields Resources Inc. On
April 17, 2003, all remaining outstanding options held by
one holder were exercised and upon exercise the holder received
a combination of 485,471

174



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


Common Shares with a value of $17 million
and cash in the amount of $3 million in lieu of certain
securities that had been called for redemption.

In September 1998, our Board of Directors, given
the expiration of a shareholder rights plan which had been
implemented in October 1988, adopted a new shareholder rights
plan that took effect on October 3, 1998. This new plan,
set forth in a Rights Plan Agreement entered into between Inco
and CIBC Mellon Trust Company, as Rights Agent, is designed to
(i) encourage the fair and equal treatment of shareholders
in connection with any bid for control by providing them with
more time than the minimum statutory period during which such
bid must remain open in order to fully consider their options,
and (ii) provide the Board of Directors with additional
time, if appropriate, to pursue other alternatives to maximize
shareholder value.

The new plan, amended in certain respects by the
Board of Directors in February 1999, was approved by
shareholders at the 1999 Annual and Special Meeting of
Shareholders and will remain in effect until October 2008
subject to reconfirmation of such plan, as may be further
amended, by holders of the voting securities at the annual
meeting of shareholders to be held in April 2005. The following
represents a summary of some of the key terms of the plan.

The rights issued under the plan will initially
attach to and trade with the Common Shares and no separate
certificates will be issued unless an event triggering these
rights occurs. Certificates evidencing Common Shares will be
legended to reflect that they evidence the rights until the
Separation Time (as defined below). Holders of the Convertible
Debentures, Subordinated Convertible Debentures and LYON Notes
and the certificates of entitlement attached thereto (which
entitle their holders to receive rights in the event that the
related security is converted into Common Shares) will generally
be entitled to receive, upon conversion of the relevant security
and presentment of the certificate of entitlement, respectively,
rights in an amount equal to the number of Common Shares issued
upon conversion of such securities.

The rights will separate from the Common Shares
(Separation Time) and be transferable, trade
separately from the Common Shares and become exercisable only
when a person acquires, or announces their intention to acquire,
beneficial ownership of 20 per cent or more of (i) the
then outstanding Voting Securities, or (ii) the then
outstanding Common Shares alone, in either case without
complying with the permitted bid provisions of the
plan (as summarized below), or without the approval of the Board
of Directors. Should such an acquisition occur, each right would
entitle its holder, other than the acquiring person or persons
related to or acting jointly or in concert with such person, to
purchase additional Common Shares at a 50 per cent discount
to the then current market price. The acquisition by any person
(an Acquiring Person) of 20 per cent or more of
the Common Shares or Voting Securities, other than by way of a
permitted bid, is referred to as a Flip-in-Event.
Any rights held by an Acquiring Person will become void upon the
occurrence of a Flip-in-Event.

A permitted bid is a bid made to all
holders of the outstanding Voting Securities that is open for at
least 60 days. If, at the end of such 60-day period, more
than 50 per cent of the then outstanding Common Shares,
other than those securities owned by the party making the bid
and certain related persons, have been tendered, such party may
take up and pay for the Common Shares but must extend the bid
for a further 10 business days to allow other shareholders to
tender, thus providing shareholders who had not tendered to the
bid with enough time to tender to the bid once it is clear that
a majority of Common Shares have been tendered.

Under this plan, we can (i) waive our
application to enable a particular takeover bid to proceed, in
which case the plan will be deemed to have been waived with
respect to any other takeover bid made prior to the expiry of
any bid subject to such waiver or (ii) with the prior
approval of the holders of Voting Securities or rights, redeem
the rights for nominal consideration at any time prior to a
Flip-in-Event.



|         |                         
|-------- | ------------------------
|Note 18. | Stock compensation plans

The stock option plans authorize the granting of
options to key employees to purchase Common Shares at prices not
less than 100 per cent of their market value on the day the
option is granted. The 2001 employee plan,

175



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


which replaced the 1997 employee plan and has a
term of five years, authorized the granting of options to
purchase up to 6,000,000 Common Shares. The Non-Employee
Director Share Option Plan, which came into effect in April 2002
and has a term of five years, authorized the granting of options
to the non-employee members of our board of directors to
purchase up to 300,000 Common Shares. The stock option plans
provide that no shares subject to any options granted shall be
purchasable after 10 years from the date of grant and also
include an anti-dilution provision to protect the option-holder
in the event of stock splits or other significant capital
changes.

At December 31, 2003, outstanding options
for 1,884,400 Common Shares, as amended for the anti-dilution
adjustment, also carry share appreciation rights
(SARs). These SARs entitle an optionee, in lieu of
exercising an option to purchase Common Shares, to surrender all
or a portion of the related option in exchange for an amount
equal to the difference between the then market price per share
and the exercise price per share specified in the stock option,
multiplied by the number of shares covered by the stock option,
or portion thereof so surrendered. We may elect to deliver
Common Shares, cash, or a combination of Common Shares and cash,
equal in value to such difference. Compensation expense in
respect of SARs for the years 2003, 2002 and 2001 was
$36 million, $7 million and $nil, respectively.

One-half of stock options granted are exercisable
on or after six months from the grant date, with the remaining
options exercisable on or after 18 months from the grant
date.

Pursuant to our mid-term incentive plans (MTIPs),
awards in the form of Common Shares are made to certain key
employees subject to transfer, sale and encumbrance restrictions
for a three-year period from the date of the award. In the year
ended December 31, 2003, 40,249 Common Shares were awarded
in respect of MTIPs (2002  32,633; 2001 
15,196).

Changes in Common Share options outstanding are
summarized as follows:

|                                   |  |                         |            |      |  |      |            |   |  |  |           |  
|---------------------------------- |  | ----------------------- | ---------- | ---- |  | ---- | ---------- | - |  |  | --------- | -
|                                   |  |                        
|                                   |  | Number of Common Shares
|                                   |  |                        
|Year ended December 31             |  | 2003                    |            | 2002 |  | 2001
|                                   |  |                         |            |      |  |     
|Outstanding at beginning of year   |  |                         | 7,476,506  |      |  |      | 7,729,634  |   |  |  | 6,977,984 |  
|Options granted                    |  |                         | 1,155,000  |      |  |      | 1,377,000  |   |  |  | 1,272,500 |  
|Options exercised                  |  |                         | (3,867,151 | )    |  |      | (1,140,700 | ) |  |  | (427,350  | )
|Options terminated                 |  |                         | (191,750   | )    |  |      | (489,428   | ) |  |  | (93,500   | )
|                                   |  |                         |            |      |  |      |            |   |  |  |           |  
|Outstanding at end of year         |  |                         | 4,572,605  |      |  |      | 7,476,506  |   |  |  | 7,729,634 |  
|                                   |  |                         |            |      |  |      |            |   |  |  |           |  
|Available for grant at December 31 |  |                         | 3,785,000  |      |  |      | 4,928,250  |   |  |  | 6,000,000 |  
|                                   |  |                         |            |      |  |      |            |   |  |  |           |  
|Exercisable at December 31         |  |                         | 3,954,107  |      |  |      | 6,765,756  |   |  |  | 7,095,134 |  
|                                   |  |                         |            |      |  |      |            |   |  |  |           |  

Changes in the weighted-average exercise price of
Common Share options are summarized as follows:

|                                 |  |                                 |        |      |  |      |        |   |  |   |        |  
|-------------------------------- |  | ------------------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                 |  |                                
|                                 |  | Weighted-average exercise price
|                                 |  |                                
|Year ended December 31           |  | 2003                            |        | 2002 |  | 2001
|                                 |  |                                 |        |      |  |     
|Outstanding at beginning of year |  | $                               | 21.42  |      |  | $    | 21.49  |   |  | $ | 21.83  |  
|Options granted                  |  |                                 | 20.90  |      |  |      | 17.80  |   |  |   | 16.96  |  
|Options exercised                |  |                                 | (18.63 | )    |  |      | (14.11 | ) |  |   | (12.47 | )
|Options terminated               |  |                                 | (26.74 | )    |  |      | (29.43 | ) |  |   | (26.17 | )
|                                 |  |                                 |        |      |  |      |        |   |  |   |        |  
|Outstanding at end of year       |  | $                               | 23.43  |      |  | $    | 21.42  |   |  | $ | 21.49  |  
|                                 |  |                                 |        |      |  |      |        |   |  |   |        |  

176



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


The following table summarizes information about
Common Share options outstanding at December 31, 2003.

|                                 |  |                      |           |                  |  |                  |     |                |  |                  |       |  |  |  |           |  |  |   |       | 
|-------------------------------- |  | -------------------- | --------- | ---------------- |  | ---------------- | --- | -------------- |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                                 |  |                     
|Common Share Options Outstanding |  | Common Share Options
|                                 |  | Exercisable         
|                                 |  | Number               |           |                  |  |                 
|                                 |  | outstanding          |           | Weighted-average |  |                  |     | Number         |  |                 
|                                 |  | at                   |           | remaining        |  |                  |     | exercisable at |  |                 
|                                 |  | December 31,         |           | contractual life |  | Weighted-average |     | December 31,   |  | Weighted-average
|Range of exercise prices         |  | 2003                 |           | (years)          |  | exercise price   |     | 2003           |  | exercise price  
|                                 |  |                      |           |                  |  |                  |     |                |  |                 
|$11-16                           |  |                      | 465,500   |                  |  |                  | 4.5 |                |  | $                | 13.40 |  |  |  | 465,500   |  |  | $ | 13.40 | 
|17-24                            |  |                      | 2,387,675 |                  |  |                  | 8.0 |                |  |                  | 18.95 |  |  |  | 1,804,177 |  |  |   | 18.40 | 
|25-37                            |  |                      | 1,719,430 |                  |  |                  | 2.6 |                |  |                  | 32.36 |  |  |  | 1,684,430 |  |  |   | 32.46 | 
|                                 |  |                      |           |                  |  |                  |     |                |  |                  |       |  |  |  |           |  |  |   |       | 
|$11-37                           |  |                      | 4,572,605 |                  |  |                  | 5.6 |                |  | $                | 23.43 |  |  |  | 3,954,107 |  |  | $ | 23.80 | 
|                                 |  |                      |           |                  |  |                  |     |                |  |                  |       |  |  |  |           |  |  |   |       | 

The expiration dates of Common Share options
outstanding at December 31, 2003 ranged from
February 16, 2004 to September 29, 2013. At
December 31, 2003, there were 310 employees
participating in the Common Share option plans.

Effective January 1, 2003, we prospectively
adopted the fair value method of accounting for stock-based
compensation. Had we elected to recognize the cost of
stock-based compensation based on the estimated fair value of
stock options granted, net earnings (loss) would have been as
follows for 2001 and 2002:

|                                                   |  |             |        |      |  |   |      | 
|-------------------------------------------------- |  | ----------- | ------ | ---- |  | - | ---- | 
|                                                   |  |            
|                                                   |  | Year ended 
|                                                   |  | December 31
|                                                   |  |            
|                                                   |  | 2002        |        | 2001
|                                                   |  |             |        |     
|Pro forma net earnings (loss)                      |  | $           | (1,486 | )    |  | $ | 301  | 
|Pro forma basic earnings (loss) per common share   |  | $           | (8.29  | )    |  | $ | 1.49 | 
|Pro forma diluted earnings (loss) per common share |  | $           | (8.29  | )    |  | $ | 1.47 | 

For 2003, an expense of $3 million was
charged to earnings with the offset credited to contributed
surplus to reflect the fair value of stock options granted to
employees in 2003. The fair value of each stock option granted
is estimated on the date of grant using an option pricing model
with the following assumptions:

|                                                                   |  |                        |       |      |  |      |       |   |  |   |       |  
|------------------------------------------------------------------ |  | ---------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                                   |  |                       
|                                                                   |  | Year ended December 31
|                                                                   |  |                       
|                                                                   |  | 2003                   |       | 2002 |  | 2001
|                                                                   |  |                        |       |      |  |     
|Stock price at grant date                                          |  | $                      | 20.85 |      |  | $    | 17.62 |   |  | $ | 16.96 |  
|Exercise price                                                     |  | $                      | 20.85 |      |  | $    | 17.62 |   |  | $ | 16.96 |  
|Weighted-average fair value of options granted
    during the year |  | $                      | 6.29  |      |  | $    | 5.92  |   |  | $ | 6.24  |  
|Expected life of options (years)                                   |  |                        | 3     |      |  |      | 3     |   |  |   | 3     |  
|Expected stock price volatility                                    |  |                        | 41.1  | %    |  |      | 44.1  | % |  |   | 47.3  | %
|Expected dividend yield                                            |  |                        |      | %    |  |      |      | % |  |   |      | %
|Risk-free interest rate                                            |  |                        | 2.1   | %    |  |      | 3.6   | % |  |   | 4.8   | %



|         |                                                 
|-------- | ------------------------------------------------
|Note 19. | Nature of operations and segment
    information

We are a leading producer of nickel and an
important producer of copper, precious metals and cobalt. Our
operations consist of the finished products segment, which
comprises the mining and processing operations in Ontario and
Manitoba, Canada, and refining operations in the United Kingdom
and interests in refining operations in Japan and other Asian
countries, and the intermediates segment, which comprises the
mining and processing operations in Indonesia, where
nickel-in-matte, an intermediate product, is produced and sold
primarily into the Japanese market. In addition, we hold mineral
claims and licenses for development projects

177



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


which include the Voiseys Bay
nickel-copper-cobalt project under development in the Province
of Newfoundland and Labrador and the Goro nickel-cobalt project
in the French Overseas Territory of New Caledonia.

Net sales to customers by product were as follows:

|                |  |                        |       |      |  |      |       |  |  |   |       | 
|--------------- |  | ---------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                |  |                       
|                |  | Year ended December 31
|                |  |                       
|                |  | 2003                   |       | 2002 |  | 2001
|                |  |                        |       |      |  |     
|Primary nickel  |  | $                      | 2,109 |      |  | $    | 1,654 |  |  | $ | 1,488 | 
|Copper          |  |                        | 171   |      |  |      | 184   |  |  |   | 195   | 
|Precious metals |  |                        | 114   |      |  |      | 238   |  |  |   | 292   | 
|Cobalt          |  |                        | 17    |      |  |      | 24    |  |  |   | 34    | 
|Other           |  |                        | 63    |      |  |      | 61    |  |  |   | 57    | 
|                |  |                        |       |      |  |      |       |  |  |   |       | 
|                |  | $                      | 2,474 |      |  | $    | 2,161 |  |  | $ | 2,066 | 
|                |  |                        |       |      |  |      |       |  |  |   |       | 

Net sales to customers include sales at market
prices to affiliates in Taiwan and South Korea aggregating
$547 million in 2003, $346 million in 2002 and
$245 million in 2001. No single non-affiliated customer
accounted for more than 10 per cent of total sales in 2003,
2002 or 2001. At December 31, 2003, accounts receivable
included amounts due from affiliates of $100 million
(2002  $19 million; 2001 
$23 million).



| |                           
| | --------------------------
| | Data by operating segments

|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |            |       |      |  |      |        |   |  |  |       |   |  |   |      |   |  |  |      |   |  |  |      |   |  |   |       |  |  |  |        |   |  |  |       | 
|----------------------------------------------------------------------------------- |  | ----------------- | ----- | ------------- |  | -------------------- | ------ | ------------ |  | ----- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---------- | ----- | ---- |  | ---- | ------ | - |  |  | ----- | - |  | - | ---- | - |  |  | ---- | - |  |  | ---- | - |  | - | ----- |  |  |  | ------ | - |  |  | ----- | 
|                                                                                    |  |                   |       |               |  |                      |        |              |  |      
|                                                                                    |  | Finished products |       | Intermediates |  | Development Projects |        | Eliminations |  | Total
|                                                                                    |  |                   |       |               |  |                      |        |              |  |      
|Year ended December 31                                                              |  | 2003              |       | 2002          |  | 2001                 |        | 2003         |  | 2002  |       | 2001 |  | 2003 |       | 2002 |  | 2001 |       | 2003 |  | 2002 |       | 2001 |  | 2003       |       | 2002 |  | 2001
|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |            |       |      |  |     
|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |           
|                                                                                    |  |                   |       | (Restated)    |  |                      |        |              |  |       |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  | (Restated)
|Net sales to customers                                                              |  | $                 | 2,369 |               |  |                      | 2,096  |              |  |       | 2,007 |      |  | $    | 105   |      |  |      | 65    |      |  |      | 59    |      |  | $          |      |      |  |      |       |   |  |  |      |   |  | $ |     |   |  |  |     |   |  |  |     |   |  | $ | 2,474 |  |  |  | 2,161  |   |  |  | 2,066 | 
|Intersegment sales                                                                  |  |                   |      |               |  |                      |       |              |  |       |      |      |  |      | 404   |      |  |      | 256   |      |  |      | 237   |      |  |            |      |      |  |      |       |   |  |  |      |   |  |   | (404 | ) |  |  | (256 | ) |  |  | (237 | ) |  |   |      |  |  |  |       |   |  |  |      | 
|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |            |       |      |  |      |        |   |  |  |       |   |  |   |      |   |  |  |      |   |  |  |      |   |  |   |       |  |  |  |        |   |  |  |       | 
|Net sales                                                                           |  | $                 | 2,369 |               |  |                      | 2,096  |              |  |       | 2,007 |      |  | $    | 509   |      |  |      | 321   |      |  |      | 296   |      |  | $          |      |      |  |      |       |   |  |  |      |   |  | $ | (404 | ) |  |  | (256 | ) |  |  | (237 | ) |  | $ | 2,474 |  |  |  | 2,161  |   |  |  | 2,066 | 
|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |            |       |      |  |      |        |   |  |  |       |   |  |   |      |   |  |  |      |   |  |  |      |   |  |   |       |  |  |  |        |   |  |  |       | 
|Earnings (loss) before income and mining taxes
    and minority interest by segment |  | $                 | 266   |               |  |                      | 307    |              |  |       | 253   |      |  | $    | 156   |      |  |      | 53    |      |  |      | 34    |      |  | $          | (18   | )    |  |      | (2,353 | ) |  |  | (6    | ) |  | $ | (31  | ) |  |  | (10  | ) |  |  | 15   |   |  | $ | 373   |  |  |  | (2,003 | ) |  |  | 296   | 
|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |            |       |      |  |      |        |   |  |  |       |   |  |   |      |   |  |  |      |   |  |  |      |   |  |   |       |  |  |  |        |   |  |  |       | 
|Expenses (income) not specifically allocable to
    segments:                       |  |                   |       |               |  |                      |        |              |  |       |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |            |       |      |  |      |        |   |  |  |       |   |  |   |      |   |  |  |      |   |  |  |      |   |  |   |       |  |  |  |        |   |  |  |       | 
|Corporate selling, general and
    administrative expenses                          |  |                   | 118   |               |  |                      | 86     |              |  |       | 63    |     
|Currency translation adjustments                                                    |  |                   | 177   |               |  |                      | 5      |              |  |       | (39   | )   
|Interest expense                                                                    |  |                   | 44    |               |  |                      | 50     |              |  |       | 56    |     
|Other income, net                                                                   |  |                   | (104  | )             |  |                      | (40    | )            |  |       | (13   | )   
|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |     
|Earnings (loss) before income and
    mining taxes and minority
    interest        |  | $                 | 138   |               |  |                      | (2,104 | )            |  |       | 229   |     
|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |     
|Depreciation and depletion                                                          |  | $                 | 171   |               |  |                      | 184    |              |  |       | 190   |      |  | $    | 94    |      |  |      | 71    |      |  |      | 73    |      |  | $          |      |      |  |      |       |   |  |  |      |   |  | $ |     |   |  |  |     |   |  |  |     |   |  | $ | 265   |  |  |  | 255    |   |  |  | 263   | 
|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |            |       |      |  |      |        |   |  |  |       |   |  |   |      |   |  |  |      |   |  |  |      |   |  |   |       |  |  |  |        |   |  |  |       | 
|Capital expenditures                                                                |  | $                 | 158   |               |  |                      | 132    |              |  |       | 141   |      |  | $    | 45    |      |  |      | 42    |      |  |      | 29    |      |  | $          | 342   |      |  |      | 556    |   |  |  | 93    |   |  | $ |     |   |  |  |     |   |  |  |     |   |  | $ | 545   |  |  |  | 730    |   |  |  | 263   | 
|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |            |       |      |  |      |        |   |  |  |       |   |  |   |      |   |  |  |      |   |  |  |      |   |  |   |       |  |  |  |        |   |  |  |       | 
|Identifiable assets at December 31                                                  |  | $                 | 2,531 |               |  |                      | 2,137  |              |  |       | 2,154 |      |  | $    | 1,295 |      |  |      | 1,217 |      |  |      | 1,230 |      |  | $          | 4,648 |      |  |      | 4,011  |   |  |  | 5,730 |   |  | $ | (46  | ) |  |  | (15  | ) |  |  | (5   | ) |  | $ | 8,428 |  |  |  | 7,350  |   |  |  | 9,109 | 
|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |            |       |      |  |      |        |   |  |  |       |   |  |   |      |   |  |  |      |   |  |  |      |   |  |   |       |  |  |  |        |   |  |  |       | 
|Other assets                                                                        |  |                   | 578   |               |  |                      | 1,227  |              |  |       | 521   |     
|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |     
|Total assets at December 31                                                         |  | $                 | 9,006 |               |  |                      | 8,577  |              |  |       | 9,630 |     
|                                                                                    |  |                   |       |               |  |                      |        |              |  |       |       |     

Other assets, which are not allocated to
operating segments, consist of corporate assets, principally
cash and cash equivalents, investments, deferred charges,
pension assets and certain receivables.

178



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)




| |                            
| | ---------------------------
| | Data by geographic location

|               |  |                             |       |                               |  |      |       |      |  |            |       |            |  |   |       |  |  |   |       |  |  |   |       | 
|-------------- |  | --------------------------- | ----- | ----------------------------- |  | ---- | ----- | ---- |  | ---------- | ----- | ---------- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|               |  |                             |       |                              
|               |  | Net sales to customers year |       | Property, plant and equipment
|               |  | ended December 31           |       | at December 31               
|               |  |                             |       |                              
|               |  | 2003                        |       | 2002                          |  | 2001 |       | 2003 |  | 2002       |       | 2001      
|               |  |                             |       |                               |  |      |       |      |  |            |       |           
|               |  |                             |       |                               |  |      |       |      |  | (Restated) |       | (Restated)
|Canada         |  | $                           | 71    |                               |  | $    | 80    |      |  | $          | 55    |            |  | $ | 5,083 |  |  | $ | 4,606 |  |  | $ | 6,907 | 
|               |  |                             |       |                               |  |      |       |      |  |            |       |            |  |   |       |  |  |   |       |  |  |   |       | 
|United States  |  |                             | 669   |                               |  |      | 667   |      |  |            | 698   |            |  |   | 22    |  |  |   | 22    |  |  |   | 23    | 
|United Kingdom |  |                             | 357   |                               |  |      | 443   |      |  |            | 520   |            |  |   | 26    |  |  |   | 24    |  |  |   | 34    | 
|Indonesia      |  |                             | 104   |                               |  |      | 65    |      |  |            | 59    |            |  |   | 1,016 |  |  |   | 1,067 |  |  |   | 1,071 | 
|New Caledonia  |  |                             |      |                               |  |      |      |      |  |            |      |            |  |   | 798   |  |  |   | 635   |  |  |   | 196   | 
|Japan          |  |                             | 374   |                               |  |      | 313   |      |  |            | 285   |            |  |   | 19    |  |  |   | 18    |  |  |   | 18    | 
|Other          |  |                             | 899   |                               |  |      | 593   |      |  |            | 449   |            |  |   | 12    |  |  |   | 10    |  |  |   | 11    | 
|               |  |                             |       |                               |  |      |       |      |  |            |       |            |  |   |       |  |  |   |       |  |  |   |       | 
|Total foreign  |  |                             | 2,403 |                               |  |      | 2,081 |      |  |            | 2,011 |            |  |   | 1,893 |  |  |   | 1,776 |  |  |   | 1,353 | 
|               |  |                             |       |                               |  |      |       |      |  |            |       |            |  |   |       |  |  |   |       |  |  |   |       | 
|Total          |  | $                           | 2,474 |                               |  | $    | 2,161 |      |  | $          | 2,066 |            |  | $ | 6,976 |  |  | $ | 6,382 |  |  | $ | 8,260 | 
|               |  |                             |       |                               |  |      |       |      |  |            |       |            |  |   |       |  |  |   |       |  |  |   |       | 

Net sales to customers by geographic location are
based on the location in which the sale originated.

Note 20. Financial instruments and
commodities contracts

The carrying values for all financial instruments
and commodities contracts approximated fair values with the
following exceptions:

|                       |                                                         |             |   |       |  |          |   |       |   |          |   |       |  |  |   |       |   |  |   |     |  |  |   |     |  
|---------------------- | ------------------------------------------------------- | ----------- | - | ----- |  | -------- | - | ----- | - | -------- | - | ----- |  |  | - | ----- | - |  | - | --- |  |  | - | --- | -
|                       |                                                         |            
|                       |                                                         | December 31
|                       |                                                         |            
|                       |                                                         |             |   |       |  |         
|                       |                                                         | 2003        |   | 2002  |  | 2001    
|                       |                                                         |             |   |       |  |         
|                       |                                                         | Carrying    |   | Fair  |  | Carrying |   | Fair  |   | Carrying |   | Fair 
|                       |                                                         | value       |   | value |  | value    |   | value |   | value    |   | value
|                       |                                                         |             |   |       |  |          |   |       |   |          |   |      
|Financial assets:      |                                                         |             |   |       |  |          |   |       |   |          |   |       |  |  |   |       |   |  |   |     |  |  |   |    
|                       | Cash and cash equivalents                               |             | $ | 418   |  |          | $ | 418   |   |          | $ | 1,087 |  |  | $ | 1,087 |   |  | $ | 306 |  |  | $ | 307 |  
|                       | Deferred charges and other assets                       |             |   | 319   |  |          |   | 389   |   |          |   | 208   |  |  |   | 226   |   |  |   | 243 |  |  |   | 221 |  
|Financial liabilities: |                                                         |             |   |       |  |          |   |       |   |          |   |       |  |  |   |       |   |  |   |     |  |  |   |    
|                       | Long-term debt including amount due within one
    year |             |   | 1,512 |  |          |   | 1,724 |   |          |   | 1,643 |  |  |   | 1,686 |   |  |   | 840 |  |  |   | 832 |  
|Derivatives:           |                                                         |             |   |       |  |          |   |       |   |          |   |       |  |  |   |       |   |  |   |     |  |  |   |    
|                       | LME forward nickel contracts                            |             |   |      |  |          |   | 30    |   |          |   |      |  |  |   | 7     |   |  |   |    |  |  |   | 1   |  
|                       | Platinum put options                                    |             |   |      |  |          |   | 1     |   |          |   |      |  |  |   |      |   |  |   |    |  |  |   |    |  
|                       | Platinum call options                                   |             |   |      |  |          |   | (4    | ) |          |   |      |  |  |   |      |   |  |   |    |  |  |   |    |  
|                       | Palladium fixed price swaps                             |             |   |      |  |          |   | 1     |   |          |   |      |  |  |   | 10    |   |  |   |    |  |  |   | 21  |  
|                       | Platinum fixed price swaps                              |             |   |      |  |          |   | (11   | ) |          |   |      |  |  |   | (3    | ) |  |   |    |  |  |   | 3   |  
|                       | Gold fixed price swaps                                  |             |   |      |  |          |   | (2    | ) |          |   |      |  |  |   |      |   |  |   |    |  |  |   |    |  
|                       | Fuel oil swaps                                          |             |   |      |  |          |   | 4     |   |          |   |      |  |  |   | 3     |   |  |   |    |  |  |   | (2  | )
|                       | Forward currency contracts                              |             |   |      |  |          |   | 47    |   |          |   |      |  |  |   | 62    |   |  |   |    |  |  |   | (4  | )
|                       | Interest rate swaps                                     |             |   |      |  |          |   | 2     |   |          |   |      |  |  |   | 8     |   |  |   |    |  |  |   | (4  | )

The fair value of financial instruments at
December 31 is based on relevant market information, the
contractual terms of the applicable instrument or contract and,
in some cases the application of a financial model. The fair
value of cash and cash equivalents and investments, including
debt securities (both available-for-sale and held-to-maturity
investments) and equity investments, is based on market prices
at the reporting date for those or

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


similar investments. The fair value of long-term
debt, platinum put and call options, and the interest rate swaps
are estimated based on market prices. The fair value of LME
forward nickel, fuel oil swaps, palladium swaps, platinum swaps
and forward currency contracts generally reflect the estimated
amounts that we would receive (pay) to terminate such
contracts at the reporting date, thereby taking into account the
current unrealized gains or losses in respect of open contracts.

In general, we do not use derivative instruments
to hedge our exposure to fluctuating nickel prices. We do enter
into LME forward purchase contracts which are substantially
offset by fixed price customer contracts in order to more fully
expose us to nickel price risk. We also enter into LME forward
sales contracts to minimize nickel price risk associated with
purchased nickel inventories of intermediates and finished
nickel products. In respect of these types of hedges, at
December 31, 2003 we had outstanding LME forward contracts
to purchase 9,048 tonnes of nickel during the 2004 to 2006
period at an average price of $12,250 per tonne
($5.56 per pound) and LME forward contracts to sell
4,104 tonnes of nickel during 2004 at an average price of
$15,858 per tonne ($7.19 per pound).

At December 31, 2003, we had outstanding put
option contracts, giving us the right but not the obligation, to
sell 60,317 troy ounces of platinum at an average price of
$643 per troy ounce at various dates over the 2004 to 2006
period, and sold call option contracts, giving the buyer the
right, but not the obligation, to purchase platinum at an
average price of $777 per troy ounce during the same time
period. At December 31, 2003, we also had outstanding put
option contracts, giving us the right, but not the obligation,
to sell 15,324 troy ounces of gold at an average price of
$345 per troy ounce at various dates during 2004, and sold
call option contracts, giving the buyer the right, but not the
obligation, to purchase gold at an average price of
$415 per troy ounce during the same time period.

Depending on market conditions, we enter into
precious metals hedging contracts with various financial
counterparties. These contracts, in the form of swap contracts
(whereby we simultaneously sell at a fixed price and buy the
same quantities for the same maturity dates at a floating
price), are intended to provide certain minimum price
realizations in respect of a portion of our future production of
such metals. At December 31, 2003, we had outstanding swap
contracts to exchange payments on 9,390 troy ounces of
palladium during 2005. Under the swap contracts, we receive a
fixed price of $295 per troy ounce and pay a floating price
based on monthly average spot prices. At December 31, 2003,
we had outstanding swap contracts to exchange payments on 82,428
troy ounces of platinum in aggregate over the period from 2004
to 2006. Under these swap contracts, we receive fixed prices
ranging from $555 to $718 per troy ounce and pay a floating
price based on monthly average spot prices. At December 31,
2003, we had outstanding swap contracts to exchange payments on
60,604 troy ounces of gold in aggregate during 2004 and 2005.
Under these swap contracts, we receive fixed prices ranging from
$374 to $405 per troy ounce and pay a floating price based
on monthly average spot prices.

We use fuel oil swap contracts to hedge the
effect of fuel oil price changes in respect of a portion of our
energy requirements in Indonesia. Under these contracts, we
receive or make payments based on the difference between a fixed
and a floating price for fuel oil. At December 31, 2003, we
had entered into swap contracts with financial institutions to
exchange payments on 120,000 tonnes of fuel oil in aggregate
during 2004 and 2005. Under the swap contracts, we pay fixed
prices averaging $134 per tonne for fuel oil and receive a
floating price based on monthly average spot price quotations.

At December 31, 2003, we had outstanding
forward currency contracts to purchase Aus.$66 million and
40 million Euros at average exchange rates of $0.525 and
$0.873, respectively, during 2004. The purpose of these
contracts, as discussed above, is to hedge a portion of the
future construction costs of the planned production facilities
for the Goro project in New Caledonia assuming a decision is
made to proceed with the project. In respect of our currency
contracts to hedge against the foreign exchange risks associated
with the Goro project, total gains in the amount of
$21 million were recorded in 2003 as income due to forward
currency contracts that became ineffective due to the deferral
of a portion of the originally planned expenditures for this
project.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


At December 31, 2003, we had outstanding
forward currency contracts to purchase Cdn.$50 million at
an average exchange rate of $0.697 during 2004. The purpose of
these contracts is to hedge a portion of the future construction
costs of the planned facilities for the initial phase of the
Voiseys Bay project. We also had outstanding at
December 31, 2003, forward currency contracts to purchase
Cdn.$35 million at an average exchange rate of $0.745
during 2004. The purpose of these contracts is to reduce the
risk that the eventual U.S. dollar cash flows relating to a
portion of our future Canadian production costs will be
adversely affected by an appreciation of the Canadian dollar.

As at December 31, 2003, we had an
outstanding interest rate swap of a notional principal amount of
$300 million on our 5.70% Debentures due 2015, whereby
we receive a fixed rate of interest of 5.70% and pay a floating
rate at 0.57% over 6-month LIBOR. We also had an interest rate
swap of a notional principal amount of $400 million on our
7.75% Notes due 2012, whereby we receive a fixed rate of
interest of 7.75% and pay a floating rate at 3.25% over 6-month
LIBOR.

At December 31, 2002, we had an interest
rate swap to manage the entire amount of the change in fair
value associated with our 9.6% Debentures due 2022. Under
the swap, we received a fixed rate of interest of 9.6 per
cent and paid a floating rate at 3.05 per cent over LIBOR.
The counterparty to the swap held a call option giving it the
right to cancel the swap commencing in 2002 at an initial
premium of 4.8 per cent, declining annually to redemption
at par in 2012 and thereafter. This swap was cancelled and the
related debt was redeemed during the course of 2003.

We are exposed to credit risk in the event of
non-performance by counterparties in connection with our
derivative contracts. We do not obtain collateral or other
security to support derivative instruments subject to credit
risk but mitigate this risk by dealing only with financially
sound counterparties and, accordingly, do not anticipate loss
for non-performance. There is no substantial concentration of
credit risk resulting from these contracts.

We had a limited recourse liability in respect of
the sale of undivided interests in certain accounts receivable
in the amount of $17 million at December 31, 2003.

Effective January 1, 2004, we will adopt new
accounting guidelines issued by the CICA in respect of hedging
relationships. We have determined that there will be no
significant impact on our results of operations or financial
condition as a result of the adoption of these guidelines.



|         |                              
|-------- | -----------------------------
|Note 21. | Commitments and contingencies



| |                
| | ---------------
| | (a) Commitments

The following table summarizes as of
December 31, 2003 certain of our long-term contractual
obligations and commercial commitments for each of the next five
years and thereafter:

|                        |  |                 |     |      |  |      |    |      |  |      |    |            |  |   |    |  |  |   |   |  |  |   |     | 
|----------------------- |  | --------------- | --- | ---- |  | ---- | -- | ---- |  | ---- | -- | ---------- |  | - | -- |  |  | - | - |  |  | - | --- | 
|                        |  |                
|                        |  | Payments due in
|                        |  |                
|                        |  | 2004            |     | 2005 |  | 2006 |    | 2007 |  | 2008 |    | Thereafter
|                        |  |                 |     |      |  |      |    |      |  |      |    |           
|Purchase obligations(1) |  | $               | 324 |      |  | $    | 65 |      |  | $    | 5  |            |  | $ | 1  |  |  | $ | 1 |  |  | $ |    | 
|Operating leases        |  |                 | 30  |      |  |      | 23 |      |  |      | 17 |            |  |   | 11 |  |  |   | 3 |  |  |   | 4   | 
|Other                   |  |                 | 2   |      |  |      | 2  |      |  |      | 2  |            |  |   | 3  |  |  |   | 3 |  |  |   | 97  | 
|                        |  |                 |     |      |  |      |    |      |  |      |    |            |  |   |    |  |  |   |   |  |  |   |     | 
|Total                   |  | $               | 356 |      |  | $    | 90 |      |  | $    | 24 |            |  | $ | 15 |  |  | $ | 7 |  |  | $ | 101 | 
|                        |  |                 |     |      |  |      |    |      |  |      |    |            |  |   |    |  |  |   |   |  |  |   |     | 



---



|    |                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These purchase obligations largely relate to the
    Goro and Voiseys Bay projects with the balance comprising
    routine orders to purchase goods and services at current
    operating locations.

In connection with our 1996 acquisition of
Diamond Fields Resources Inc., we assumed an obligation to pay
to a company retained by Diamond Field Resources Inc. to provide
certain exploration and other services an

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


annual royalty amounting to three per cent of the
net proceeds received from the sale of ores, metals and other
minerals produced from our Voiseys Bay project, after
deducting certain costs associated with the production and sale
of the ores, metals and minerals produced. We have not incurred
any such royalty payments to date since the Voiseys Bay
project is not yet in production.

We are also committed to pay a quarterly
production royalty to the Indonesian government in respect of
our nickel ore production in Indonesia. The royalty is
determined based on the nickel or cobalt, as applicable, content
of the ore and ranges from $0.015 to $0.03 per kilogram
contained in the ore, based on certain assumptions with respect
to the market price of nickel. During the years ended
December 31, 2003, 2002 and 2001, we paid royalties to the
Indonesian government amounting to $5 million,
$3 million and $4 million, respectively.

We are required to make certain periodic payments
in connection with the use of our mining properties and
processing facilities, including payments for our mining
licenses, leases, occupation and surface rights. During the
years ended December 31, 2003, 2002 and 2001 we paid
$4 million, $4 million and $3 million,
respectively, in such payments.



|    |              
|--- | -------------
|(b) | Contingencies

In the course of our operations, we and our
subsidiaries are subject to routine claims and litigation
incidental to the business conducted by them, to various
environmental proceedings, and to other litigation related to
such business. With respect to the environmental proceedings
currently pending or threatened against us, they include
(1) a proceeding brought under the Ontario class action
legislation covering claims relating to the alleged decline in
property values in a community where we had operated a nickel
refinery over the 1918  1984 period, (2) claims
for personal injury, (3) enforcement actions,
(4) alleged violations of, including exceeding regulatory
limits relating to discharges under, certain environmental or
similar laws and regulations applicable to our operations in
Canada and elsewhere and (5) certain claims dating back a
number of years in which one of our subsidiaries was designated,
under the United States federal environmental law known as
Superfund or CERCLA, as a potentially
responsible party. We believe that the ultimate resolution of
such proceedings, claims and litigation will not significantly
impair our operations or have a material adverse effect on our
financial position or results of operation.



|         |                         
|-------- | ------------------------
|Note 22. | Supplemental information

Supplemental information in connection with the
Consolidated Statement of Cash Flows follows:

|                                             |  |                        |     |      |  |      |       |   |  |   |     | 
|-------------------------------------------- |  | ---------------------- | --- | ---- |  | ---- | ----- | - |  | - | --- | 
|                                             |  |                       
|                                             |  | Year ended December 31
|                                             |  |                       
|                                             |  | 2003                   |     | 2002 |  | 2001
|                                             |  |                        |     |      |  |     
|Interest paid, net of capitalized interest   |  | $                      | 48  |      |  | $    | 38    |   |  | $ | 61  | 
|                                             |  |                        |     |      |  |      |       |   |  |   |     | 
|Income and mining taxes paid (refunded), net |  | $                      | 120 |      |  | $    | (9    | ) |  | $ | 190 | 
|                                             |  |                        |     |      |  |      |       |   |  |   |     | 
|Cash                                         |  | $                      | 42  |      |  | $    | 36    |   |  | $ | 21  | 
|Cash equivalents                             |  |                        | 376 |      |  |      | 1,051 |   |  |   | 285 | 
|                                             |  |                        |     |      |  |      |       |   |  |   |     | 
|Cash and cash equivalents                    |  | $                      | 418 |      |  | $    | 1,087 |   |  | $ | 306 | 
|                                             |  |                        |     |      |  |      |       |   |  |   |     | 



|         |                                                                    
|-------- | -------------------------------------------------------------------
|Note 23. | Significant differences between Canadian and
    United States GAAP

Our consolidated financial statements are
prepared in accordance with Canadian GAAP. The differences
between Canadian and United States GAAP, insofar as they affect
our consolidated financial statements, relate to accounting for
post-retirement benefits, depreciation and depletion, intangible
assets, research and development, exploration, asset impairment,
our convertible debt, derivative instruments, investments,
income and mining taxes and reporting of comprehensive income.
As noted in (p) below, certain figures have been restated
in 2002 and 2001.

182



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


The following table reconciles results as
reported under Canadian GAAP with those that would have been
reported under United States GAAP:

|                                                                                                              |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |      |  
|------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ---------------------- | --- | ---------- | - | ---------- | ------ | ------ | - | - | ---- | ---- | -
|                                                                                                              |                                                                                                                         |                       
|                                                                                                              |                                                                                                                         | Year ended December 31
|                                                                                                              |                                                                                                                         |                       
|                                                                                                              |                                                                                                                         | 2003                   |     | 2002       |   | 2001      
|                                                                                                              |                                                                                                                         |                        |     |            |   |           
|                                                                                                              |                                                                                                                         |                        |     | (Restated) |   | (Restated)
|Net earnings (loss)  Canadian GAAP                                                                           |                                                                                                                         | $                      | 137 |            |   | $          | (1,482 | )      |   | $ | 304  |     
|Increased post-retirement benefits expense (a)                                                                |                                                                                                                         |                        | (37 | )          |   |            | (23    | )      |   |   | (22  | )   
|Decreased depreciation and depletion expense (b)                                                              |                                                                                                                         |                        | 38  |            |   |            | 13     |        |   |   |     |     
|Increased intangible assets amortization expense
    (c)                                                      |                                                                                                                         |                        | (2  | )          |   |            | (2     | )      |   |   |     |     
|Increased research and development expense (d)                                                                |                                                                                                                         |                        | (5  | )          |   |            | (6     | )      |   |   | (8   | )   
|Increased exploration expense (e)                                                                             |                                                                                                                         |                        | (4  | )          |   |            | (3     | )      |   |   | (7   | )   
|Increased asset impairment charges (f)                                                                        |                                                                                                                         |                        |    |            |   |            | (708   | )      |   |   |     |     
|Increased interest expense (g)                                                                                |                                                                                                                         |                        | (25 | )          |   |            | (9     | )      |   |   | (11  | )   
|Unrealized net gain (loss) on derivative
    instruments (h)                                                  |                                                                                                                         |                        | (1  | )          |   |            | 5      |        |   |   | (4   | )   
|Increased income and mining tax expense (i)                                                                   |                                                                                                                         |                        | (15 | )          |   |            |       |        |   |   |     |     
|Decreased (increased) minority interest (b)(d)(e)                                                             |                                                                                                                         |                        | (9  | )          |   |            | (3     | )      |   |   | 2    |     
|Change in accounting policy (j)                                                                               |                                                                                                                         |                        |    |            |   |            | 1      |        |   |   | 1    |     
|Taxes on United States GAAP differences                                                                       |                                                                                                                         |                        | 18  |            |   |            | 141    |        |   |   | 17   |     
|                                                                                                              |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     
|Net earnings (loss) before cumulative effect of a
    change in accounting principle 
    United States GAAP |                                                                                                                         | $                      | 95  |            |   | $          | (2,076 | )      |   | $ | 272  |     
|Cumulative effect of a change in accounting
    principle (b)(j)                                              |                                                                                                                         |                        | (17 | )          |   |            | (2     | )      |   |   |     |     
|                                                                                                              |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     
|Net earnings (loss)  United States GAAP                                                                      |                                                                                                                         | $                      | 78  |            |   | $          | (2,078 | )      |   | $ | 272  |     
|                                                                                                              |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     
|Other comprehensive income (loss) (l):                                                                        |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     
|                                                                                                              | Unrealized net loss on derivatives designated as
    cash flow hedges at January 1, 2001 (h)                            |                        |     |           |   |            |        |       |   |   |      | (4   | )
|                                                                                                              | Reclassification to earnings of net loss (gain)
    on derivatives designated as cash flow hedges (h)                   |                        |     | (21        | ) |            |        | (19    | ) |   |      | 4    |  
|                                                                                                              | Reclassification to earnings of net loss
    (gain) on derivatives due to ineffectiveness (h)                           |                        |     | (8         | ) |            |        |       |   |   |      |     |  
|                                                                                                              | Changes in fair value of derivatives designated
    as cash flow hedges (h)                                             |                        |     | 5          |   |            |        | 26     |   |   |      | 23   |  
|                                                                                                              | Unrealized gains (losses) on long-term
    investments (k)                                                              |                        |     | 68         |   |            |        | 17     |   |   |      | (3   | )
|                                                                                                              | Unrealized gains (losses) on marketable
    securities (k)                                                              |                        |     |           |   |            |        |       |   |   |      | (1   | )
|                                                                                                              | Long-term investments reclassified to earnings (k)                                                                      |                        |     | (18        | ) |            |        | 24     |   |   |      |     |  
|                                                                                                              | Marketable securities reclassifications (k)                                                                             |                        |     |           |   |            |        | (1     | ) |   |      |     |  
|                                                                                                              | Minimum additional pension liability adjustment
    (a)                                                                 |                        |     | (125       | ) |            |        | (318   | ) |   |      | (180 | )
|                                                                                                              | Taxes on other comprehensive income (loss)                                                                              |                        |     | 68         |   |            |        | 102    |   |   |      | 56   |  
|                                                                                                              |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     
|Other comprehensive loss  United
    States GAAP (l)                                                         |                                                                                                                         |                        | (31 | )          |   |            | (169   | )      |   |   | (105 | )   
|                                                                                                              |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     
|Comprehensive income (loss)  United
    States GAAP (l)                                                      |                                                                                                                         | $                      | 47  |            |   | $          | (2,247 | )      |   | $ | 167  |     
|                                                                                                              |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     
|Net earnings (loss) per share  Basic
    (m)                                                                 |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     
|                                                                                                              | Net earnings (loss) per share before cumulative
    effect of a change in accounting principle  United
    States GAAP |                        | $   | 0.40       |   |            | $      | (11.50 | ) |   | $    | 1.35 |  
|                                                                                                              | Cumulative effect of a change in accounting
    principle (b)(j)                                                        |                        | $   | (0.09      | ) |            | $      | (0.01  | ) |   | $    |     |  
|                                                                                                              |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     
|                                                                                                              | Net earnings (loss) per share  Basic
    (m)                                                                           |                        | $   | 0.31       |   |            | $      | (11.51 | ) |   | $    | 1.35 |  
|                                                                                                              |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     
|Net earnings (loss) per share  Diluted
    (m)                                                               |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     
|                                                                                                              | Net earnings (loss) per share before cumulative
    effect of a change in accounting principle  United
    States GAAP |                        | $   | 0.39       |   |            | $      | (11.50 | ) |   | $    | 1.33 |  
|                                                                                                              | Cumulative effect of a change in accounting
    principle (b)(j)                                                        |                        | $   | (0.09      | ) |            | $      | (0.01  | ) |   | $    |     |  
|                                                                                                              |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     
|                                                                                                              | Net earnings (loss) per share  Diluted
    (m)                                                                         |                        | $   | 0.30       |   |            | $      | (11.51 | ) |   | $    | 1.33 |  
|                                                                                                              |                                                                                                                         |                        |     |            |   |            |        |        |   |   |      |     

183



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)




|    |                         
|--- | ------------------------
|(a) | Post-retirement benefits

For Canadian reporting purposes, we amortize the
excess of the net actuarial gains and losses over 10 per
cent of the greater of the post-retirement benefits obligation
and the fair value of plan assets over the expected average
remaining service life of employees. For United States reporting
purposes, we amortize all actuarial gains and losses
systematically over the expected average remaining service life
of employees.

United States GAAP also requires the recognition
of a minimum additional pension liability in the amount of the
excess of the unfunded accumulated benefits obligation over the
recorded pension benefits liability; an offsetting intangible
pension asset is recorded equal to the unrecognized prior
service costs, with any difference recorded as a reduction in
accumulated other comprehensive income. At December 31,
2003, the minimum additional pension liability would have been
$1,042 million (2002  $900 million;
2001  $582 million) and the intangible pension
asset would have been $84 million (2002 
$67 million; 2001  $67 million), resulting
in a $581 million reduction, after taxes, (2002 
$523 million; 2001  $309 million) in
accumulated other comprehensive income.



|    |                                       
|--- | --------------------------------------
|(b) | Depreciation and depletion
    expense

Under Canadian GAAP, we deplete mine development
costs on a composite basis. Total historical capitalized costs
and estimated future development costs relating to our developed
and undeveloped reserves are depreciated using the
unit-of-production method based on total developed and
undeveloped proven and probable reserves in our twenty-year
plan. For PT Inco, all assets are being depreciated on the basis
of this unit-of-production method.

For United States GAAP purposes, amortization of
the deferred mine development costs is calculated on a
unit-of-production basis over the estimated proven and probable
ore reserves which relate to the particular category of
development, either life of mine plan or area-specific. No
future development costs are taken into account in calculating
the amortization charge.

Life of mine plan development comprises capital
expenditures that will be utilized in the extraction of all the
estimated proven and probable ore reserves in the current
detailed mine plan. These expenditures are predominantly
incurred up front and in advance of any ore extraction or in
advance of major expansions. The types of development included
in this category include ore haulage shafts, initial decline,
ore passes, ventilation, and chutes and underground ore crusher
cavities and are intended to be used for the extraction of all
ore within the current mine plan. These costs are amortized on a
unit-of-production basis over the total estimated proven and
probable ore reserves.

Area-specific development costs, which are
amortized over estimated proven and probable ore reserves for
which no further capital is required, consist of capital
expenditures to provide access to various areas within the mine
to allow the extraction of ore to commence. The types of
development costs that are within this category include: access
and perimeter drives, ventilation drives and rises, and
progressive declining subsequent to initial contact with the
orebody. Annual deferred mine development costs incurred to
access specific ore blocks or areas are amortized on a
unit-of-production basis over the estimated proven and probable
ore reserves that can be currently accessed in those areas
without future capital development costs being incurred.

Ongoing mine development costs that provide
access to ore for less than two years production are
expensed as incurred.

For United States GAAP purposes, we have restated
PT Incos depreciation and depletion expense for the
amortization of deferred mine development costs and changed the
amortization of other assets from a unit-of-production method to
a straight line method over the lesser of the assets
useful life up to 10 years in respect of mine and mobile
equipment; the lesser of the assets useful life and the
term of the current contract of work that expires in 2025 in
respect of roads, bridges and process plant buildings and
equipment; and, in the case hydroelectric facilities, the lesser
of the assets useful life up to 50 years.

184



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


We have restated our depreciation and depletion
expense for 2002 to conform to United States GAAP. As a result
of this change, certain balance sheet accounts as of
January 1, 2002 were restated as follows: the deficit
increased by $2 million; property, plant and equipment
increased by $4 million; minority interest increased by
$12 million; and deferred income and mining taxes decreased
by $6 million. The effect of the change in methodology was
a decrease to depreciation and depletion expense of
$38 million in 2003 (2002  $13 million); an
increase to property, plant and equipment of $38 million
(2002  $13 million); an increase to minority
interest of $10 million (2002  $5 million);
and an increase to deferred income and mining taxes of
$12 million (2002  $3 million). The
cumulative effect was a decrease to our net earnings of
$2 million, or 1 cent per share, in 2002, which is
shown as a cumulative effect of a change in accounting
principle. For 2001, the impact would have been a decrease in
depreciation and depletion expense of $9 million.



|    |                  
|--- | -----------------
|(c) | Intangible assets

Canadian GAAP contains an apparent conflict in
the treatment of mineral rights with respect to balance sheet
classification. CICA 1581, Business Combinations, defines
such assets as intangible assets, while CICA 3061, Property,
Plant and Equipment, defines acquired mineral rights as
property, plant and equipment. We have interpreted the adoption
of CICA 1581 and its companion statement CICA 3062, Goodwill
and Other Intangible Assets, in a manner that has led us to
conclude that we are not required to change how we account for
such mineral rights under Canadian GAAP. In the United States,
SFAS No. 141, Business Combinations, which is
consistent with CICA 1581, requires that under United States
GAAP mineral rights are classified as intangible assets. This
matter has been referred to the Emerging Issues Task Force
(EITF) of the United States Financial Accounting
Standards Board for its consideration. There can be no certainty
as to the conclusions the EITF will reach, nor as to whether the
apparent conflict under Canadian GAAP will be resolved. For
Canadian GAAP, we have classified such assets, less the related
accumulated depreciation, depletion and amortization, as
Property, plant and equipment, net on our
consolidated balance sheet.

Under United States GAAP acquisition costs
associated with mining interests are classified according to the
land tenure position. Under United States GAAP costs associated
with owned mineral claims and mining leases where we do not own
the underlying land are classified as finite life intangible
assets and amortized over the period of intended use. For
mineral claims with estimated proven and probable ore reserves,
amortization is taken on a unit-of-production basis resulting in
no charge during the exploration and development phase. For
mineral claims where we have not determined that estimated
proven and probable ore reserves exist the associated costs are
amortized on a straight-line basis over their estimated useful
lives taking into account residual values. At such time as an
undeveloped mineral interest is determined to contain proven and
probable ore reserves, the remaining unamortized balance is
amortized on a unit-of-production basis as described above.

Residual values for undeveloped mineral interests
represent the expected fair value of the interests at the time
that we plan to convert, develop, further explore or dispose of
the interests. Residual values are determined based on
(1) discounted cash flow analyses and (2) reference to
recent transactions of third parties involving similar
undeveloped mineral interests. Based on our knowledge of
secondary markets that exist and are expected to continue to
exist for the purchase and sale of such assets, we believe that
the methods described above to determine residual values are
representative of the amounts that we expect to receive if the
undeveloped mineral interests were sold to a third party.

These assets are tested for recoverability
whenever events or changes in circumstances indicate that their
carrying value may not be recoverable.

The only significant mineral rights that have a
carrying value on our balance sheet relate to the Voiseys
Bay deposits acquired in 1996. For United States GAAP purposes,
with respect to this acquisition, the carrying value has been
reclassified from property, plant and equipment to intangible
assets on the balance sheet and comprises a gross carrying value
of $2,471 million in 2003 and 2002. There is no impact on
the amortization of the portion

185



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


of the intangible asset value assigned to the
estimated proven and probable ore reserves until commencement of
mine production currently estimated to start in 2006.

With respect to the portion of the intangible
asset value assigned to the remainder of the deposit, the
difference between the gross carrying value of $480 million
and the residual value is being amortized on a straight line
basis over the period until estimated proven and probable ore
reserves are established and underground development and mining
are expected to commence. We have restated the results for 2002
to adopt the accounting treatment described above which resulted
in a pre-tax charge of $2 million under United States GAAP.



|    |                                     
|--- | ------------------------------------
|(d) | Research and development
    expense

Under Canadian GAAP, development costs are
deferred and amortized if the development project meets certain
generally accepted criteria for deferral and amortization. In
addition, fixed assets including equipment may be acquired or
constructed in order to provide facilities or carry out a
research and development project. The use of such assets will
extend over a number of accounting periods and, accordingly, are
capitalized and amortized over their useful lives. Under United
States GAAP research and development costs are charged to
expense in the period incurred and certain balance sheet
accounts as of December 31, 2002 and 2001 have been
restated as follows to reflect this difference to
Canadian GAAP: the deficit increased by $29 million
(2001  $25 million); property, plant and
equipment decreased by $37 million (2001 
$31 million); deferred income and mining taxes decreased by
$3 million (2001  $2 million); and minority
interest decreased by $5 million (2001 
$4 million). For the year ended December 31, 2003, the
impact on our research and development expense was an increase
of $5 million (2002  $6 million;
2001  $8 million) representing research and
development costs previously capitalized which are now being
expensed, net of any related amortization. For the year ended
December 31, 2003, minority interest expense was decreased
as a result of this restatement in the amount of $nil
(2002  $1 million; 2001 
$1 million).



|    |                    
|--- | -------------------
|(e) | Exploration expense

Under Canadian GAAP, capitalized exploration
expenditures are classified under property, plant and equipment
with the related mineral claim. For United States GAAP,
exploration expenditures are not capitalized unless proven and
probable reserves have been established by a feasibility study.
As a result of our adopting this policy for United States GAAP,
certain balance sheet accounts as of December 31, 2002 and
2001 have been restated as follows: the deficit increased by
$56 million (2001  $55 million); property,
plant and equipment decreased by $90 million
(2001  $87 million); deferred income and mining
taxes decreased by $30 million (2001 
$29 million); and minority interest decreased by
$4 million (2001  $3 million). For the year
ended December 31, 2003, the impact on our exploration
expense was an increase of $4 million (2002 
$3 million; 2001  $7 million) representing
exploration costs previously capitalized which are expensed
under United States GAAP, net of any related amortization. For
the year ended December 31, 2003, the minority interest was
decreased as a result of this restatement in the amount of
$1 million (2002  $1 million;
2001  $1 million). A portion of the exploration
expenses referred to above were previously written off as a part
of the asset impairment charges discussed below. As a result of
this change, the asset impairment charges recorded in 2002 were
restated with a reduction of $71 million.



|    |                         
|--- | ------------------------
|(f) | Asset impairment charges

Under United States GAAP in accordance with SFAS
No. 144, when the net carrying value of a long-lived asset
exceeds the future undiscounted cash flows expected to result
from the use and eventual disposition of the asset, the excess
over its fair value is charged to earnings. Prior to 2003, under
Canadian GAAP, when the net carrying value of a long-lived asset
exceeded the future undiscounted cash flows expected to result
from the use and eventual disposition of the asset, the excess
over its net recoverable amount was charged to earnings. In
addition, financing costs are excluded from the evaluation of a
long-lived asset for impairment purposes under

186



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


United States GAAP whereas such costs were
previously included under Canadian GAAP. For United States
reporting purposes, in 2002, the non-cash asset impairment
charges would have been $2,148 million, net of deferred
income and mining taxes of $915 million, in respect of the
reduction in the carrying value of the Voiseys Bay project
and $55 million, net of income and mining taxes of
$5 million, in respect of the reduction in the carrying
value of certain property, plant, equipment and other assets.
Fair value was estimated using discounted probability-weighted
expected net cash flows and a risk-free interest rate. For
United States segment reporting purposes, pre-tax charges of
$3,063 million and $60 million would be included in
the development projects and finished products segments,
respectively.



|    |                 
|--- | ----------------
|(g) | Convertible debt

Under Canadian GAAP, the convertible debt is
classified as an equity instrument. The convertible debt
accretes over their respective terms to their value at maturity
through periodic after-tax charges to retained earnings. Under
United States GAAP, the convertible debt would be accounted for
as debt and, accordingly, accretion charges and amortization of
debt issuance costs would be recorded as interest expense. For
United States GAAP, the convertible debt would be classified as
current debt in the 12month periods in advance of their
special conversion dates and as longterm debt during the
remainder of their term.



|    |                       
|--- | ----------------------
|(h) | Derivative instruments

Under United States GAAP, all derivatives,
whether designated in hedging relationships or not, are required
to be recorded in the balance sheet at fair value. A derivative
must be designated in a hedging relationship in order to qualify
for hedge accounting. These standards include a determination of
what portions of hedges are deemed to be effective versus
ineffective. In general, a hedging relationship is effective
when a change in the fair value of the derivative is offset by
an equal and opposite change in the fair value of the underlying
hedged item. In accordance with these standards, effectiveness
tests are performed in order to assess effectiveness and
quantify ineffectiveness for all designated hedges. At
December 31, 2003, we had outstanding fair value hedges and
cash flow hedges. A fair value hedge is a hedge of the change in
the fair value of an asset, liability or firm commitment. If a
derivative is designated as a fair value hedge, changes in the
fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. A cash flow hedge
is a hedge of the exposure in variability in expected future
cash flows that is attributable to a particular risk such as a
forecasted purchase or sale. If a derivative is designated as a
cash flow hedge, the effective portions of the changes in the
fair value of the derivative are recorded in other comprehensive
income and are recognized in earnings when the hedged item
affects earnings. Ineffective portions of changes in the fair
value of the derivatives designated as hedges are recognized in
earnings.

LME forward nickel contracts are used to hedge
the effect of fluctuations in the price of nickel with respect
to sales of Inco-source nickel to customers for delivery three
or more months in the future. These LME forward nickel contracts
have been designated as fair value hedges in connection with
firm sale commitments. For the year ended December 31,
2003, a loss of $1.4 million was charged to net sales due
to the ineffectiveness of such outstanding fair value hedges and
a loss of $0.1 million was charged to other income, net due
to hedged firm commitments no longer qualifying as a fair value
hedge. At December 31, 2003, we had two interest rate swaps
intended to manage the interest rate risk associated with a
portion of our fixed-rate debt, which have been designated as
fair value hedges. The interest rate swap changes our exposure
to the change in fair value of certain debt by effectively
converting a portion of our fixed-rate debt to a floating rate.

Depending on market conditions, we enter into
precious metals fixed price swap and option contracts and nickel
option contracts with various financial counterparties who must
meet certain established criteria. These contracts, which have
been designated as cash flow hedges, are intended to provide
certain minimum price realizations in respect of a portion of
forecasted sales. In addition, we have entered into forward
currency contracts to hedge a portion of the future construction
costs of our planned production facilities in New Caledonia and
the Province of Newfoundland and Labrador that will be
denominated in currencies other than the

187



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


U.S. dollar. For the year ended
December 31, 2003, we recognized a net gain of
$11 million in other income, net which represented the
total ineffectiveness of our outstanding cash flow hedges. A
gain of $21 million, including $8 million with respect
to the reclassification of comprehensive income, was credited to
the charge for Goro project suspension costs due to hedged
forecasted cash flows no longer qualifying as a cash flow value
hedge. At December 31, 2003, $15 million of deferred
net gains on derivative instruments recorded in other
comprehensive income are expected to be reclassified to net
sales during the next 12 months. The maximum term over
which cash flows are hedged is 30 months.

We also purchase and sell metals, fuel oil and
foreign currencies which have not been specifically identified
as hedges. With respect to metals, we use forward contracts to
manage the price risk associated with copper, gold and purchases
of nickel and copper from third parties to meet our
customers requirements. With respect to fuel oil, we use
swaps to manage the cost of a portion of our energy requirements
in Indonesia. With respect to foreign currencies, by virtue of
our international operations, we conduct business in a number of
foreign currencies other than the U.S. dollar. Our primary
exchange risk is to changes in the value of the Canadian dollar,
the currency in which a substantial portion of our costs are
incurred, relative to the U.S. dollar. The impact of this
risk is reduced by entering into forward contracts and foreign
currency options which typically do not extend beyond one year.
At December 31, 2003, an unrealized net gain of
$1.7 million was credited to other income, net in respect
of derivative instruments which were not specifically designated
as hedges.



|    |                        
|--- | -----------------------
|(i) | Income and mining taxes

As discussed in (f) above, there is a
difference in the carrying value of the Voiseys Bay
project due to the impairment charge in 2002. Under both
Canadian and United States GAAP, deferred income and mining
taxes are recorded at the expected rate of reversal. In 2003,
there was a change in tax rates in the jurisdiction of the
Voiseys Bay project. The impact of this change in tax
rates is different for Canadian and United States GAAP due to
the temporary difference created by the asset impairment charge.



|    |                             
|--- | ----------------------------
|(j) | Asset retirement obligations

Effective January 1, 2003, we adopted, for
United States reporting purposes, Statement of Financial
Accounting Standards (SFAS) No. 143, Accounting for
Asset Retirement Obligationsand CICA 3110, Asset
Retirement Obligations, which are substantially identical.
Under SFAS No. 143, asset retirement obligations are
recognized when incurred and recorded as liabilities at fair
value. The liability is accreted over time through periodic
charges to earnings. In addition, the asset retirement cost is
capitalized as part of the assets carrying value and
depreciated over either the straight line method and the
unit-of-production method assuming estimated proven and probable
ore reserves depending on the nature of the asset being retired.
The cumulative effect of adopting SFAS No. 143 was a
decrease to our net earnings of $17 million, or 10 cents
per share, in 2003, which is shown as a cumulative effect of a
change in accounting principle. As at January 1, 2003,
property, plant and equipment increased by $39 million,
deferred income and mining taxes decreased by $11 million,
and asset retirement obligations increased by $67 million.
For Canadian GAAP, financial results of comparative periods have
been restated which resulted in a net loss to income of
$1 million for the years ended December 31, 2002 and
2001.



|    |            
|--- | -----------
|(k) | Investments

United States accounting standards for equity
investments, which are set forth in SFAS No. 115,
require that certain equity investments not held for trading be
recorded at fair value with unrealized holding gains and losses
excluded from the determination of earnings and reported as a
separate component of other comprehensive income. At
December 31, 2003, deferred charges and other assets would
have increased by $69 million (2002  increase of
$19 million; 2001  decrease of
$22 million), cash and cash equivalents would have
increased by $nil million (2002  $nil million;
2001  $1 million) and accumulated other
comprehensive loss would have decreased by $69 million
(2002  decrease of $19 million; 2001 
increase of $21 million) before taxes.

188



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)




|    |                     
|--- | --------------------
|(l) | Comprehensive income

United States accounting standards for reporting
comprehensive income are set forth in SFAS No. 130.
Comprehensive income represents the change in equity during a
reporting period from transactions and other events and
circumstances from non-owner sources. Components of
comprehensive income include items such as net earnings (loss),
changes in the fair value of investments not held for trading,
minimum pension liability adjustments, derivative instruments
and certain foreign currency translation gains and losses.



|    |                          
|--- | -------------------------
|(m) | Earnings (loss) per share

The computation of basic and diluted earnings
(loss) per share under United States GAAP was as follows:

|                                                  |                                                                        |                        |      |            |       |            |        |         |   |   |      |         |       | 
|------------------------------------------------- | ---------------------------------------------------------------------- | ---------------------- | ---- | ---------- | ----- | ---------- | ------ | ------- | - | - | ---- | ------- | ----- | 
|                                                  |                                                                        |                       
|                                                  |                                                                        | Year ended December 31
|                                                  |                                                                        |                       
|                                                  |                                                                        | 2003                   |      | 2002       |       | 2001      
|                                                  |                                                                        |                        |      |            |       |           
|                                                  |                                                                        |                        |      | (Restated) |       | (Restated)
|Basic earnings (loss) per share
    computation   |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|Numerator:                                        |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|                                                  | Net earnings (loss)                                                    |                        | $    | 78         |       |            | $      | (2,078  | ) |   | $    | 272     |      
|                                                  | Dividends on preferred shares                                          |                        |      | (6         | )     |            |        | (26     | ) |   |      | (26     | )    
|                                                  | Premium on redemption of preferred shares                              |                        |      | (15        | )     |            |        |        |   |   |      |        |      
|                                                  |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|                                                  | Net earnings (loss) applicable to common shares                        |                        | $    | 57         |       |            | $      | (2,104  | ) |   | $    | 246     |      
|                                                  |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|Denominator:                                      |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|                                                  | Weighted-average common shares outstanding
    (thousands)             |                        |      | 184,500    |       |            |        | 182,830 |   |   |      | 182,074 |      
|                                                  |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|Basic earnings (loss) per common share            |                                                                        | $                      | 0.31 |            |       | $          | (11.51 | )       |   | $ | 1.35 |        
|                                                  |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|Diluted earnings (loss) per share
    computation |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|Numerator:                                        |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|                                                  | Net earnings (loss) applicable to common shares                        |                        | $    | 57         |       |            | $      | (2,104  | ) |   | $    | 246     |      
|                                                  | Dilutive effect of:                                                    |                        |      |            |       |            |        |         |   |   |      |         |      
|                                                  |                                                                        | Convertible debentures |      |            |      |            |        |         |  |   |      |         | 6     | 
|                                                  |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|                                                  | Net earnings (loss) applicable to common shares,
    assuming dilution |                        | $    | 57         |       |            | $      | (2,104  | ) |   | $    | 252     |      
|                                                  |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|Denominator:                                      |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|                                                  | Weighted-average common shares outstanding
    (thousands)             |                        |      | 184,500    |       |            |        | 182,830 |   |   |      | 182,074 |      
|                                                  | Dilutive effect of:                                                    |                        |      |            |       |            |        |         |   |   |      |         |      
|                                                  |                                                                        | Convertible debentures |      |            |      |            |        |         |  |   |      |         | 5,750 | 
|                                                  |                                                                        | Stock options          |      |            | 1,707 |            |        |         |  |   |      |         | 868   | 
|                                                  |                                                                        | Warrants               |      |            | 1,308 |            |        |         |  |   |      |         |      | 
|                                                  |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|                                                  | Weighted-average common shares outstanding,
    assuming dilution      |                        |      | 187,515    |       |            |        | 182,830 |   |   |      | 188,692 |      
|                                                  |                                                                        |                        |      |            |       |            |        |         |   |   |      |        
|Diluted earnings (loss) per common share          |                                                                        | $                      | 0.30 |            |       | $          | (11.51 | )       |   | $ | 1.33 |        
|                                                  |                                                                        |                        |      |            |       |            |        |         |   |   |      |        

At December 31, 2003, convertible debt which
is convertible into 17,440,696 Common Shares (2002 
9,705,111; 2001  4,180,601), options on 819,000
Common Shares (2002  7,476,506; 2001 
5,261,534), Preferred Shares convertible into nil Common Shares
(2002  11,277,868; 2001  11,277,987) and
Warrants

189



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


exercisable for nil Common Shares
(2002  11,023,497; 2001  11,021,947) were
excluded from the computation of diluted earnings (loss) per
Common Share because their effects were not dilutive.



|    |                         
|--- | ------------------------
|(n) | Stock-based compensation

We adopted a new accounting standard of the CICA
in respect of stockbased compensation. This new standard
is substantially identical to United States GAAP. For further
information, reference is made to Note 2(a). Had we elected
to recognize the cost of our stock-based compensation based on
the estimated fair value of stock options granted, our United
States GAAP proforma results would have been as follows:

|                                              |         |             |        |            |   |   |     |      | 
|--------------------------------------------- | ------- | ----------- | ------ | ---------- | - | - | --- | ---- | 
|                                              |         |            
|                                              |         | Year ended 
|                                              |         | December 31
|                                              |         |            
|                                              |         | 2002        |        | 2001      
|                                              |         |             |        |           
|                                              |         | (Restated)  |        | (Restated)
|Pro forma net earnings (loss)                 |         | $           | (2,082 | )          |   | $ | 268 |     
|                                              |         |             |        |            |   |   |     |     
|Pro form net earnings (loss) per common share |         |             |        |            |   |   |     |     
|                                              | Basic   |             | $      | (11.53     | ) |   | $   | 1.33 | 
|                                              | Diluted |             | $      | (11.53     | ) |   | $   | 1.31 | 

The fair value of each stock option granted is
estimated on the date of grant using an option pricing model
with the assumptions noted in Note 18.



|    |                 
|--- | ----------------
|(o) | Preferred shares

For United States reporting purposes, the
Preferred Shares Series E would be excluded from
shareholders equity in the Consolidated Balance Sheet.



|    |                                                                        
|--- | -----------------------------------------------------------------------
|(p) | Restatement of United States GAAP
    Consolidated Financial Statements

We identified certain accounting matters relating
to our December 31, 2002 and 2001 Consolidated Financial
Statements for United States GAAP purposes that require
restatement. These matters are discussed in parts (b) (c) (d)
and (e) above.

190



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


The following table sets forth the effect of
these restatements on our consolidated net earnings:

|                                                                                                                          |                                                          |             |        |      |   |  |     |    |  
|------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------- | ------ | ---- | - |  | --- | -- | -
|                                                                                                                          |                                                          |            
|                                                                                                                          |                                                          | Year ended 
|                                                                                                                          |                                                          | December 31
|                                                                                                                          |                                                          |            
|                                                                                                                          |                                                          | 2002        |        | 2001
|                                                                                                                          |                                                          |             |        |     
|Net earning (loss)  United States
    GAAP, as previously reported                                                       |                                                          |             | (2,119 | )    |   |  | 283 |   
|Restatements                                                                                                              |                                                          |             |        |      |   |  |     |   
|                                                                                                                          | Decreased depreciation and depletion expense (b)         |             |        | 13   |   |  |     |   |  
|                                                                                                                          | Increased intangible assets amortization expense
    (c) |             |        | (2   | ) |  |     |   |  
|                                                                                                                          | Increased research and development expense (d)           |             |        | (6   | ) |  |     | (8 | )
|                                                                                                                          | Increased exploration expense (e)                        |             |        | (3   | ) |  |     | (7 | )
|                                                                                                                          | Decreased (increased) minority interest (b)(d)(e)        |             |        | (3   | ) |  |     | 2  |  
|                                                                                                                          | Decreased asset impairment charges (e)                   |             |        | 71   |   |  |     |   |  
|                                                                                                                          | Taxes on restated United States GAAP differences         |             |        | (27  | ) |  |     | 2  |  
|                                                                                                                          |                                                          |             |        |      |   |  |     |   
|Net earning (loss) before cumulative effect of a
    change in accounting principle  United States GAAP,
    as restated |                                                          |             | (2,076 | )    |   |  | 272 |   
|Restated cumulative effect of a change in
    accounting principle (b)                                                    |                                                          |             | (2     | )    |   |  |    |   
|                                                                                                                          |                                                          |             |        |      |   |  |     |   
|Net earnings (loss)  United States
    GAAP, as restated                                                                 |                                                          |             | (2,078 | )    |   |  | 272 |   
|                                                                                                                          |                                                          |             |        |      |   |  |     |   

The following tables set forth the effect of
these restatements on our balance sheet as at December 31, 2002
and 2001:

|                      |                                      |                         |  |               |   |            |  |              |   |             |  |            |   |          |  |     |   |  |  |     |   |  |  |    |  |  |  |        |  
|--------------------- | ------------------------------------ | ----------------------- |  | ------------- | - | ---------- |  | ------------ | - | ----------- |  | ---------- | - | -------- |  | --- | - |  |  | --- | - |  |  | -- |  |  |  | ------ | -
|                      |                                      |                        
|                      |                                      | As at December 31, 2002
|                      |                                      |                        
|                      |                                      |                         |  | Depreciation  |   | Intangible |  | Research and |   |             |  | Asset      |   |         
|                      |                                      | As Previously           |  | and Depletion |   | Assets     |  | Development  |   | Exploration |  | Impairment |   | As      
|                      |                                      | Reported                |  | (b)           |   | (c)        |  | (d)          |   | (e)         |  | (e)        |   | Restated
|                      |                                      |                         |  |               |   |            |  |              |   |             |  |            |   |         
|Assets:               |                                      |                         |  |               |   |            |  |              |   |             |  |            |   |          |  |     |   |  |  |     |   |  |  |    |  |  |  |       
|                      | Cash and cash equivalents            |                         |  | 1,087         |   |            |  |             |   |             |  |           |   |          |  |    |   |  |  |    |   |  |  |   |  |  |  | 1,087  |  
|                      | Accounts receivable                  |                         |  | 289           |   |            |  |             |   |             |  |           |   |          |  |    |   |  |  |    |   |  |  |   |  |  |  | 289    |  
|                      | Property, plant and equipment        |                         |  | 5,566         |   |            |  | 17           |   |             |  | (2,471     | ) |          |  | (37 | ) |  |  | (90 | ) |  |  | 71 |  |  |  | 3,056  |  
|                      | Intangible assets                    |                         |  |              |   |            |  |             |   |             |  | 2,469      |   |          |  |    |   |  |  |    |   |  |  |   |  |  |  | 2,469  |  
|                      | Deferred charges and other assets    |                         |  | 141           |   |            |  |             |   |             |  |           |   |          |  |    |   |  |  |    |   |  |  |   |  |  |  | 141    |  
|Liabilities:          |                                      |                         |  |               |   |            |  |              |   |             |  |            |   |          |  |     |   |  |  |     |   |  |  |    |  |  |  |       
|                      | Long-term debt due within one year   |                         |  | 97            |   |            |  |             |   |             |  |           |   |          |  |    |   |  |  |    |   |  |  |   |  |  |  | 97     |  
|                      | Other accrued liabilities            |                         |  | 217           |   |            |  |             |   |             |  |           |   |          |  |    |   |  |  |    |   |  |  |   |  |  |  | 217    |  
|                      | Long-term debt                       |                         |  | 1,781         |   |            |  |             |   |             |  |           |   |          |  |    |   |  |  |    |   |  |  |   |  |  |  | 1,781  |  
|                      | Deferred income and mining taxes     |                         |  | 882           |   |            |  | (3           | ) |             |  | (1         | ) |          |  | (3  | ) |  |  | (30 | ) |  |  | 27 |  |  |  | 872    |  
|                      | Post-retirement benefits             |                         |  | 1,304         |   |            |  |             |   |             |  |           |   |          |  |    |   |  |  |    |   |  |  |   |  |  |  | 1,304  |  
|                      | Minority interest                    |                         |  | 368           |   |            |  | 17           |   |             |  |           |   |          |  | (5  | ) |  |  | (4  | ) |  |  |   |  |  |  | 376    |  
|Shareholders equity: |                                      |                         |  |               |   |            |  |              |   |             |  |            |   |          |  |     |   |  |  |     |   |  |  |    |  |  |  |       
|                      | Retained earnings (deficit)          |                         |  | (991          | ) |            |  | 3            |   |             |  | (1         | ) |          |  | (29 | ) |  |  | (56 | ) |  |  | 44 |  |  |  | (1,030 | )
|                      | Accumulated other comprehensive loss |                         |  | (485          | ) |            |  |             |   |             |  |           |   |          |  |    |   |  |  |    |   |  |  |   |  |  |  | (485   | )

191



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


|                      |                                      |                         |  |               |   |            |  |              |  |             |  |            |  |          |  |     |   |  |  |     |   |  |  |   |  |  |  |       |  
|--------------------- | ------------------------------------ | ----------------------- |  | ------------- | - | ---------- |  | ------------ |  | ----------- |  | ---------- |  | -------- |  | --- | - |  |  | --- | - |  |  | - |  |  |  | ----- | -
|                      |                                      |                        
|                      |                                      | As at December 31, 2001
|                      |                                      |                        
|                      |                                      |                         |  | Depreciation  |   | Intangible |  | Research and |  |             |  | Asset      |  |         
|                      |                                      | As Previously           |  | and Depletion |   | Assets     |  | Development  |  | Exploration |  | Impairment |  | As      
|                      |                                      | Reported                |  | (b)           |   | (c)        |  | (d)          |  | (e)         |  | (e)        |  | Restated
|                      |                                      |                         |  |               |   |            |  |              |  |             |  |            |  |         
|Assets:               |                                      |                         |  |               |   |            |  |              |  |             |  |            |  |          |  |     |   |  |  |     |   |  |  |   |  |  |  |      
|                      | Cash and cash equivalents            |                         |  | 307           |   |            |  |             |  |             |  |           |  |          |  |    |   |  |  |    |   |  |  |  |  |  |  | 307   |  
|                      | Accounts receivable                  |                         |  | 303           |   |            |  |             |  |             |  |           |  |          |  |    |   |  |  |    |   |  |  |  |  |  |  | 303   |  
|                      | Property, plant and equipment        |                         |  | 8,217         |   |            |  |             |  |             |  |           |  |          |  | (31 | ) |  |  | (87 | ) |  |  |  |  |  |  | 8,099 |  
|                      | Deferred charges and other assets    |                         |  | 164           |   |            |  |             |  |             |  |           |  |          |  |    |   |  |  |    |   |  |  |  |  |  |  | 164   |  
|Liabilities:          |                                      |                         |  |               |   |            |  |              |  |             |  |            |  |          |  |     |   |  |  |     |   |  |  |   |  |  |  |      
|                      | Long-term debt due within one year   |                         |  | 317           |   |            |  |             |  |             |  |           |  |          |  |    |   |  |  |    |   |  |  |  |  |  |  | 317   |  
|                      | Other accrued liabilities            |                         |  | 194           |   |            |  |             |  |             |  |           |  |          |  |    |   |  |  |    |   |  |  |  |  |  |  | 194   |  
|                      | Long-term debt                       |                         |  | 755           |   |            |  |             |  |             |  |           |  |          |  |    |   |  |  |    |   |  |  |  |  |  |  | 755   |  
|                      | Deferred income and mining taxes     |                         |  | 1,901         |   |            |  |             |  |             |  |           |  |          |  | (2  | ) |  |  | (29 | ) |  |  |  |  |  |  | 1,870 |  
|                      | Post-retirement benefits             |                         |  | 957           |   |            |  |             |  |             |  |           |  |          |  |    |   |  |  |    |   |  |  |  |  |  |  | 957   |  
|                      | Minority interest                    |                         |  | 350           |   |            |  |             |  |             |  |           |  |          |  | (4  | ) |  |  | (3  | ) |  |  |  |  |  |  | 343   |  
|Shareholders equity: |                                      |                         |  |               |   |            |  |              |  |             |  |            |  |          |  |     |   |  |  |     |   |  |  |   |  |  |  |      
|                      | Retained earnings (deficit)          |                         |  | 1,154         |   |            |  |             |  |             |  |           |  |          |  | (25 | ) |  |  | (55 | ) |  |  |  |  |  |  | 1,074 |  
|                      | Accumulated other comprehensive loss |                         |  | (316          | ) |            |  |             |  |             |  |           |  |          |  |    |   |  |  |    |   |  |  |  |  |  |  | (316  | )



|    |                    
|--- | -------------------
|(q) | Comparative figures

The following tables compare results reported
under Canadian GAAP with those that would have been reported
under United States GAAP, together with the cumulative effect on
balance sheet accounts. Quarterly results are unaudited.
Restatements in respect of Canadian GAAP are discussed in
Note 2. Restatements in respect of United States GAAP are
discussed in Note 23, parts (b), (c), (d) and
(e) above.

|                                     |                |                        |   |                    |   |            |   |            |   |            |   |            |   |  |   |      |   |  |   |        |   |  |   |      |  
|------------------------------------ | -------------- | ---------------------- | - | ------------------ | - | ---------- | - | ---------- | - | ---------- | - | ---------- | - |  | - | ---- | - |  | - | ------ | - |  | - | ---- | -
|                                     |                |                       
|                                     |                | Year ended December 31
|                                     |                |                       
|                                     |                |                        |   |                   
|                                     |                | Canadian GAAP          |   | United States GAAP
|                                     |                |                        |   |                   
|                                     |                | 2003                   |   | 2002               |   | 2001       |   | 2003       |   | 2002       |   | 2001      
|                                     |                |                        |   |                    |   |            |   |            |   |            |   |           
|                                     |                |                        |   | (Restated)         |   | (Restated) |   | (Restated) |   | (Restated) |   | (Restated)
|Net earnings (loss)                  |                |                        |   |                    |   |            |   |            |   |            |   |            |   |  |   |      |   |  |   |        |   |  |   |     
|                                     | First quarter  |                        | $ | 30                 |   |            | $ | 11         |   |            | $ | 85         |   |  | $ | 14   |   |  |   | 5      |   |  | $ | 78   |  
|                                     | Second quarter |                        |   | 60                 |   |            |   | (1,582     | ) |            |   | 192        |   |  |   | (191 | ) |  |   | (2,166 | ) |  |   | 171  |  
|                                     | Third quarter  |                        |   | (27                | ) |            |   | 91         |   |            |   | 33         |   |  |   | (30  | ) |  |   | 89     |   |  |   | 36   |  
|                                     | Fourth quarter |                        |   | 74                 |   |            |   | (2         | ) |            |   | (6         | ) |  |   | 285  |   |  |   | (6     | ) |  |   | (13  | )
|                                     |                |                        |   |                    |   |            |   |            |   |            |   |            |   |  |   |      |   |  |   |        |   |  |   |     
|                                     | Year           |                        | $ | 137                |   |            | $ | (1,482     | ) |            | $ | 304        |   |  | $ | 78   |   |  | $ | (2,078 | ) |  | $ | 272  |  
|                                     |                |                        |   |                    |   |            |   |            |   |            |   |            |   |  |   |      |   |  |   |        |   |  |   |     
|Net earnings (loss) per common share |                |                        |   |                    |   |            |   |            |   |            |   |            |   |  |   |      |   |  |   |        |   |  |   |     
|                                     | Basic          |                        | $ | 0.59               |   |            | $ | (8.27      | ) |            | $ | 1.51       |   |  | $ | 0.31 |   |  | $ | (11.51 | ) |  | $ | 1.35 |  
|                                     | Diluted        |                        | $ | 0.58               |   |            | $ | (8.27      | ) |            | $ | 1.49       |   |  | $ | 0.30 |   |  | $ | (11.51 | ) |  | $ | 1.33 |  

192



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)


|                      |                                      |               |   |                    |   |            |   |       |   |            |   |            |  |  |   |       |   |  |   |        |   |  |   |       |  
|--------------------- | ------------------------------------ | ------------- | - | ------------------ | - | ---------- | - | ----- | - | ---------- | - | ---------- |  |  | - | ----- | - |  | - | ------ | - |  | - | ----- | -
|                      |                                      |              
|                      |                                      | December 31  
|                      |                                      |              
|                      |                                      |               |   |                   
|                      |                                      | Canadian GAAP |   | United States GAAP
|                      |                                      |               |   |                   
|                      |                                      | 2003          |   | 2002               |   | 2001       |   | 2003  |   | 2002       |   | 2001      
|                      |                                      |               |   |                    |   |            |   |       |   |            |   |           
|                      |                                      |               |   | (Restated)         |   | (Restated) |   |       |   | (Restated) |   | (Restated)
|Assets:               |                                      |               |   |                    |   |            |   |       |   |            |   |            |  |  |   |       |   |  |   |        |   |  |   |      
|                      | Cash and cash equivalents            |               | $ | 418                |   |            | $ | 1,087 |   |            | $ | 306        |  |  | $ | 418   |   |  | $ | 1,087  |   |  | $ | 307   |  
|                      | Accounts receivable                  |               |   | 435                |   |            |   | 251   |   |            |   | 277        |  |  |   | 474   |   |  |   | 289    |   |  |   | 303   |  
|                      | Property, plant and equipment        |               |   | 6,976              |   |            |   | 6,382 |   |            |   | 8,260      |  |  |   | 3,671 |   |  |   | 3,056  |   |  |   | 8,099 |  
|                      | Intangible assets                    |               |   |                   |   |            |   |      |   |            |   |           |  |  |   | 2,467 |   |  |   | 2,469  |   |  |   |      |  
|                      | Deferred charges and other assets    |               |   | 319                |   |            |   | 208   |   |            |   | 243        |  |  |   | 256   |   |  |   | 141    |   |  |   | 164   |  
|Liabilities:          |                                      |               |   |                    |   |            |   |       |   |            |   |            |  |  |   |       |   |  |   |        |   |  |   |      
|                      | Long-term debt due within one year   |               |   | 103                |   |            |   | 97    |   |            |   | 81         |  |  |   | 92    |   |  |   | 97     |   |  |   | 317   |  
|                      | Other accrued liabilities            |               |   | 332                |   |            |   | 210   |   |            |   | 189        |  |  |   | 369   |   |  |   | 217    |   |  |   | 194   |  
|                      | Long-term debt                       |               |   | 1,409              |   |            |   | 1,546 |   |            |   | 759        |  |  |   | 2,035 |   |  |   | 1,781  |   |  |   | 755   |  
|                      | Deferred income and mining taxes     |               |   | 1,696              |   |            |   | 1,352 |   |            |   | 2,105      |  |  |   | 1,115 |   |  |   | 872    |   |  |   | 1,870 |  
|                      | Post-retirement benefits             |               |   | 603                |   |            |   | 475   |   |            |   | 451        |  |  |   | 1,522 |   |  |   | 1,304  |   |  |   | 957   |  
|                      | Asset retirement obligations         |               |   | 141                |   |            |   | 119   |   |            |   | 121        |  |  |   | 141   |   |  |   | 52     |   |  |   | 49    |  
|                      | Minority interest                    |               |   | 415                |   |            |   | 368   |   |            |   | 350        |  |  |   | 432   |   |  |   | 376    |   |  |   | 343   |  
|Shareholders equity: |                                      |               |   |                    |   |            |   |       |   |            |   |            |  |  |   |       |   |  |   |        |   |  |   |      
|                      | Convertible debt                     |               |   | 606                |   |            |   | 238   |   |            |   | 231        |  |  |   |      |   |  |   |       |   |  |   |      |  
|                      | Retained earnings (deficit)          |               |   | (226               | ) |            |   | (335  | ) |            |   | 1,177      |  |  |   | (973  | ) |  |   | (1,030 | ) |  |   | 1,074 |  
|                      | Accumulated other comprehensive loss |               |   |                   |   |            |   |      |   |            |   |           |  |  |   | (516  | ) |  |   | (485   | ) |  |   | (316  | )

Changes in retained earnings and accumulated
other comprehensive loss under United States GAAP were as
follows:

|                                                                             |  |                        |        |            |  |            |        |   |  |   |       |  
|---------------------------------------------------------------------------- |  | ---------------------- | ------ | ---------- |  | ---------- | ------ | - |  | - | ----- | -
|                                                                             |  |                       
|                                                                             |  | Year ended December 31
|                                                                             |  |                       
|                                                                             |  | 2003                   |        | 2002       |  | 2001      
|                                                                             |  |                        |        |            |  |           
|                                                                             |  |                        |        | (Restated) |  | (Restated)
|Retained earnings (deficit) at beginning of
    year, as previously reported |  | $                      | (1,030 | )          |  | $          | 1,154  |   |  | $ | 897   |  
|Restatements (d)(e)                                                          |  |                        |       |            |  |            | (80    | ) |  |   | (69   | )
|                                                                             |  |                        |        |            |  |            |        |   |  |   |       |  
|Retained earnings (deficit) at beginning of
    year, as restated            |  |                        | (1,030 | )          |  |            | 1,074  |   |  |   | 828   |  
|Net earnings (loss)                                                          |  |                        | 78     |            |  |            | (2,078 | ) |  |   | 272   |  
|Preferred dividends                                                          |  |                        | (6     | )          |  |            | (26    | ) |  |   | (26   | )
|Premium on redemption of preferred shares                                    |  |                        | (15    | )          |  |            |       |   |  |   |      |  
|                                                                             |  |                        |        |            |  |            |        |   |  |   |       |  
|Retained earnings (deficit) at end of year                                   |  | $                      | (973   | )          |  | $          | (1,030 | ) |  | $ | 1,074 |  
|                                                                             |  |                        |        |            |  |            |        |   |  |   |       |  
|Accumulated other comprehensive loss at beginning
    of year                |  | $                      | (485   | )          |  | $          | (316   | ) |  | $ | (211  | )
|Other comprehensive loss                                                     |  |                        | (31    | )          |  |            | (169   | ) |  |   | (105  | )
|                                                                             |  |                        |        |            |  |            |        |   |  |   |       |  
|Accumulated other comprehensive loss at end of
    year                      |  | $                      | (516   | )          |  | $          | (485   | ) |  | $ | (316  | )
|                                                                             |  |                        |        |            |  |            |        |   |  |   |       |  

193



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)




|    |                                     
|--- | ------------------------------------
|(r) | Recent Accounting
    Pronouncements

Effective January 1, 2003, we adopted, for
United States reporting purposes, SFAS No. 143,
Accounting for Asset Retirement Obligations. Under
SFAS No. 143, retirement obligations will be
recognized when incurred and recorded as liabilities at fair
value. The liability is accreted over time through periodic
charges to earnings. In addition, the asset retirement cost is
capitalized as part of the assets carrying value and
depreciated over the assets useful life. The effect of the
adoption of the new standard is described in Note 23(j)
above.

Effective January 1, 2003, we adopted, for
United States reporting purposes, SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 applies to costs
associated with an exit activity that does not involve an entity
newly acquired in a business combination, an asset retirement
obligation covered by SFAS No. 143 or with a disposal
activity covered by SFAS No. 144.
SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity shall be recognized
and measured initially at its fair value in the period in which
the liability is incurred provided that such fair value can be
reasonably estimated. An exception applies for certain one-time
termination benefits that are incurred over time. The adoption
of the new standard had no impact on our financial statements.

Effective January 1, 2003, we adopted, for
United States reporting purposes, SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure  an amendment of
FAS 123. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results. Effective January 1, 2003, we have adopted, for
stock options granted in 2003 and in future years, the fair
value based method of accounting for our stock-based employee
compensation. This change in accounting decreased net earnings
by $3 million for the year ended December 31, 2003.

Effective June 30, 2003, we adopted, for
United States reporting purposes, SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends Statement
133 for decisions made (1) as part of the Derivatives
Implementation Group process that effectively required
amendments to Statement 133, (2) in connection with other
FASB projects dealing with financial instruments, and
(3) in connection with implementation issues raised in
relation to the application of the definition of a derivative,
in particular, the meaning of an initial net investment that is
smaller than would be required for other types of contracts that
would be expected to have a similar response to changes in
market factors, the meaning of underlying, and the
characteristics of a derivative that contains financing
components. In particular, this Statement (1) clarifies
under what circumstances a contract with an initial net
investment meets the characteristic of a derivative discussed in
paragraph 6(b) of Statement 133, (2) clarifies when a
derivative contains a financing component, (3) amends the
definition of an underlying to conform it to language used in
FASB Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and
(4) amends certain other existing pronouncements. The
standard had no impact on our financial statements.

Effective July 1, 2003, we adopted, for
United States reporting purposes, SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
SFAS No. 150 requires, for financial instruments
meeting certain criteria, that an issuer must classify the
instruments as liabilities (or assets in some circumstances).
The adoption of this new standard did not have a significant
impact on our results of operations or financial condition.

194



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SCHEDULE VIII

INCO LIMITED AND SUBSIDIARIES

VALUATION ACCOUNTS AND RESERVES


(In thousands)


|                                |  |                              |        |            |  |              |        |         |  |   |       |  |  |   |        | 
|------------------------------- |  | ---------------------------- | ------ | ---------- |  | ------------ | ------ | ------- |  | - | ----- |  |  | - | ------ | 
|                                |  |                              |        | Additions  |  | Deductions   |        |        
|                                |  | Balance at                   |        | Charged to |  | For Accounts |        | Balance
|                                |  | Beginning                    |        | Costs and  |  | Receivable   |        | at End 
|                                |  | of Year                      |        | Expenses   |  | Written Off  |        | of Year
|                                |  |                              |        |            |  |              |        |        
|                                |  | Year ended December 31, 2003
|                                |  |                             
|Allowance for doubtful accounts |  | $                            | 17,456 |            |  | $            | 636    |         |  | $ | 2,686 |  |  | $ | 15,406 | 
|                                |  | Year ended December 31, 2002
|                                |  |                             
|Allowance for doubtful accounts |  | $                            | 3,875  |            |  | $            | 13,619 |         |  | $ | 38    |  |  | $ | 17,456 | 
|                                |  | Year ended December 31, 2001
|                                |  |                             
|Allowance for doubtful accounts |  | $                            | 3,886  |            |  | $            | 1,959  |         |  | $ | 1,970 |  |  | $ | 3,875  | 

195



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SUPPLEMENTAL FINANCIAL INFORMATION

Quarterly Financial Information

|                                     |         |                                                                 |     |         |  |         |        |            |   |            |     |       |   |   |     |       |   |   |        |       |  
|------------------------------------ | ------- | --------------------------------------------------------------- | --- | ------- |  | ------- | ------ | ---------- | - | ---------- | --- | ----- | - | - | --- | ----- | - | - | ------ | ----- | -
|                                     |         | First                                                           |     | Second  |  | Third   |        | Fourth     |   |           
|                                     |         | Quarter                                                         |     | Quarter |  | Quarter |        | Quarter    |   | Year      
|                                     |         |                                                                 |     |         |  |         |        |            |   |           
|                                     |         |                                                                 |     |         |  |         |        | (Restated) |   | (Restated)
|                                     |         |                                                                
|                                     |         | (in millions of United States dollars except per share amounts)
|2003                                 |         |                                                                 |     |         |  |         |        |            |   |            |     |       |   |   |     |       |   |   |        |      
|Net sales                            |         | $                                                               | 593 |         |  | $       | 599    |            |   | $          | 450 |       |   | $ | 832 |       |   | $ | 2,474  |      
|Net earnings (loss)                  |         | $                                                               | 30  |         |  | $       | 60     |            |   | $          | (27 | )     |   | $ | 74  |       |   | $ | 137    |      
|Net earnings (loss) per common share |         |                                                                 |     |         |  |         |        |            |   |            |     |       |   |   |     |       |   |   |        |      
|                                     | Basic   |                                                                 | $   | 0.04    |  |         | $      | 0.32       |   |            | $   | (0.16 | ) |   | $   | 0.39  |   |   | $      | 0.59  |  
|                                     | Diluted |                                                                 | $   | 0.04    |  |         | $      | 0.32       |   |            | $   | (0.16 | ) |   | $   | 0.36  |   |   | $      | 0.58  |  
|2002                                 |         |                                                                 |     |         |  |         |        |            |   |            |     |       |   |   |     |       |   |   |        |      
|Net sales                            |         | $                                                               | 506 |         |  | $       | 591    |            |   | $          | 536 |       |   | $ | 528 |       |   | $ | 2,161  |      
|Net earnings (loss)                  |         | $                                                               | 11  |         |  | $       | (1,582 | )          |   | $          | 91  |       |   | $ | (2  | )     |   | $ | (1,482 | )    
|Net earnings (loss) per common share |         |                                                                 |     |         |  |         |        |            |   |            |     |       |   |   |     |       |   |   |        |      
|                                     | Basic   |                                                                 | $   | 0.02    |  |         | $      | (8.70      | ) |            | $   | 0.46  |   |   | $   | (0.05 | ) |   | $      | (8.27 | )
|                                     | Diluted |                                                                 | $   | 0.02    |  |         | $      | (8.70      | ) |            | $   | 0.45  |   |   | $   | (0.05 | ) |   | $      | (8.27 | )

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



Disclosure Controls and Procedures

As of the end of the period covered by this
Report, the Companys Chief Executive Officer and Chief
Financial Officer reviewed the Companys disclosure
controls and procedures (as such term is defined in
Section 240.13a-15(e) under the Securities Exchange Act of
1934, as amended) and, based upon the evaluation of such
controls and procedures required by paragraph (b) of
Section 240.13a-15 of the Securities Exchange Act of 1934,
as amended, concluded that such disclosure controls and
procedures were effective and met the requirements thereof.




Internal Control Over Financial
Reporting

No change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended) occurred during the
fourth quarter of our fiscal year ended December 31, 2003
that has materially affected, or is reasonable likely to
materially affect, our internal control over financial reporting.

197



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##### Table of Contents






PART III





|         |                                                     
|-------- | ----------------------------------------------------
|Item 10. | Directors and Executive Officers of Inco
    Limited

The information under Election of
Directors, Information Regarding the Board and Board
Committees  Board Committees, and Audit
Committee Report in the Companys Proxy Circular and
Statement dated February 20, 2004 (the 2004 Proxy
Statement), filed as Exhibit 99 hereto, is
incorporated herein by reference to such information. Reference
is also made to Executive Officers of Inco Limited
above.

The Company has adopted a Code of Ethics for
Financial Personnel governing its senior officers and employees
with financial reporting and related responsibilities and has
posted such code on its web site, www.inco.com. Within
the time period required by the SEC and the New York Stock
Exchange, we will post on our website any amendment to the Code
of Ethics for Financial Personnel and any waiver applicable to
our senior financial officers and our executive officers or
directors. We have also posted on our website the Board of
Directors Guidelines on Corporate Governance and the
charters of our Audit Committee, Corporate Governance and
Nominating Committee, Management and Resources and Compensation
Committee, Pension Committee and Environment, Health and Safety
Committee. Any of the foregoing documents are available in print
upon request of any shareholder to our investor relations
personnel through our website or by telephone at
(416) 361-7670.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information under Executive
Compensation, Report on Executive Compensation
and Comparative Shareholder Return in the 2004 Proxy
Statement is incorporated herein by reference to such
information. Reference is also made to Executive Officers
of Inco Limited above.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management



Security Ownership of Certain Beneficial
Owners and Management

The information under Ownership of
Securities in the 2004 Proxy Statement is incorporated
herein by reference to such information. Reference is also made
to Executive Officers of Inco Limited and
Securities Authorized for Issuance under Equity
Compensation Plans above.




Changes in Control

There are no arrangements known to the Company
the operation of which may at a subsequent date result in a
change of control of the Company.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

None.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information under Auditors
Fees in the 2004 Proxy Statement is incorporated herein by
reference to such information.

198



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PART IV





|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

|      |  |        |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|----- |  | ------ |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)1. |  |        |  |     |  | List of Financial Statements Included under
    Item 8 of this Report                                                                                                                                                                                                                                                                                                                                
|      |  |        |  |     |  | Auditors Report                                                                                                                                                                                                                                                                                                                                                                                     
|      |  |        |  |     |  | Consolidated Statement of Earnings                                                                                                                                                                                                                                                                                                                                                                   
|      |  |        |  |     |  | Consolidated Statement of Retained Earnings                                                                                                                                                                                                                                                                                                                                                          
|      |  |        |  |     |  | Consolidated Balance Sheet                                                                                                                                                                                                                                                                                                                                                                           
|      |  |        |  |     |  | Consolidated Statement of Cash Flows                                                                                                                                                                                                                                                                                                                                                                 
|      |  |        |  |     |  | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                           
|      |  |        |  |     |  | Supplementary Financial Information (unaudited)                                                                                                                                                                                                                                                                                                                                                      
|(a)2. |  |        |  |     |  | List of Financial Statement Schedules included
    under Item 8 of this Report                                                                                                                                                                                                                                                                                                                       
|      |  |        |  |     |  | Schedule VIII  Valuation accounts
    and reserves                                                                                                                                                                                                                                                                                                                                                  
|(a)3. |  |        |  |     |  | Exhibits                                                                                                                                                                                                                                                                                                                                                                                             
|      |  | (3)(i) |  |     |  | Articles of Continuance of the Company as amended
    to April 25, 2001 (incorporated by reference to
    Exhibit 3(i) and 4 to the Companys Quarterly Report
    on Form 10-Q for the quarterly period ended June 30,
    2001)                                                                                                                                                                    
|      |  | (ii)   |  | (a) |  | General By-law No. 1 of the Company as
    amended to February 3, 2004 (subject to shareholder
    ratification)                                                                                                                                                                                                                                                                                     
|      |  |        |  | (b) |  | Standing Resolution of the Company as amended to
    February 3, 2004                                                                                                                                                                                                                                                                                                                                
|      |  | (4)(i) |  | (a) |  | Reference is made to(3)(i) and (ii) above                                                                                                                                                                                                                                                                                                                                                            
|      |  |        |  | (b) |  | Warrant Agreement dated December 1, 2000
    among the Company, CIBC Mellon Trust Company and ChaseMellon
    Shareholder Services LLC, as Canadian and U.S. Warrant
    Agents, respectively (incorporated by reference to the
    Registration Statement on Form F-10 (File
    No. 333-12748) as filed with the Commission on
    December 7, 2000)                                               
|      |  |        |  | (c) |  | Shareholder Rights Plan Agreement dated as of
    September 14, 1998, as amended and restated as of
    April 28, 1999, between Inco Limited and CIBC Mellon Trust
    Company, as Rights Agent (incorporated by reference to
    Attachment A to the Companys 1999 Proxy Statement attached
    as Exhibit 99 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 1998)
|      |  | (ii)   |  |     |  | The Company hereby agrees to furnish to the
    Commission a copy of any instrument relating to outstanding
    long-term debt of the Company upon request of the Commission                                                                                                                                                                                                                         
|      |  | (10)   |  | (a) |  | Voiseys Bay Development Agreement dated as
    of September 30, 2002 among Her Majesty the Queen in Right
    of Newfoundland and Labrador, Voiseys Bay Nickel Company
    Limited and Inco Limited (incorporated by reference to
    Exhibit 99(i) to the Companys Current Report on
    Form 8-K dated October 7, 2002)                                                                         
|      |  |        |  | (b) |  | Voiseys Bay Industrial and Employment
    Benefits Agreement dated as of September 30, 2002 among Her
    Majesty the Queen in Right of Newfoundland and Labrador,
    Voiseys Bay Nickel Company Limited and Inco Limited
    (incorporated by reference to Exhibit 99(ii) to the
    Companys Current Report on Form 8-K dated
    October 7, 2002)                                             
|      |  |        |  | (c) |  | 2002 Non-Employee Director Share Option Plan
    (incorporated by reference to Exhibit B to the
    Companys 2002 Proxy Statement filed as Exhibit 99 to
    the Companys Annual Report on Form 10-K for the year
    ended December 31, 2001)                                                                                                                                                     
|      |  |        |  | (d) |  | 2001 Key Employees Incentive Plan (incorporated
    by reference to Exhibit A to the Companys 2001 Proxy
    Statement filed as Exhibit 99 to the Companys Annual
    Report on Form 10-K for the year ended December 31,
    2000)                                                                                                                                                                
|      |  |        |  | (e) |  | 1997 Key Employees Incentive Plan (incorporated
    by reference to Exhibit A to the Companys 1997 Proxy
    Statement filed as Exhibit 99 to the Companys Annual
    Report on Form 10-K for the year ended December 31,
    1996 (File No. 1-1143))                                                                                                                                              
|      |  |        |  | (f) |  | 1993 Key Employees Incentive Plan (incorporated
    by reference to the Prospectus in Registration Statement
    No. 33-71298)                                                                                                                                                                                                                                                                       

199



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| |  |      |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ---- |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |      |  | (g) |  | 1998 Non-Employee Director Share Ownership Plan
    as amended to December 4, 2001 (incorporated by reference
    to Exhibit 10(g) to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |      |  | (h) |  | Forms of two Agreements, each dated as of between
    March 23, 1998 and December 3, 2002 between certain
    executive officers of the Company (all executive officers in the
    case of the form of Agreement referred to in (2) below and
    S.M. Hand, R.C. Aelick S.F. Feiner, P.J. Goudie,
    F.S. Hakimi, P.C. Jones and L. Kruger in the case
    of the form of Agreement referred to in (1) below) and Inco
    Limited covering severance payments and continuation of certain
    benefits in the event of (1) involuntary termination of
    employment (except for cause) or resignation under certain
    circumstances not wholly voluntary or (2) involuntary
    termination of employment (except for cause) or resignation
    under certain circumstances not wholly voluntary within two
    years following a change in control (as defined in such
    agreements) (incorporated by reference to
    Exhibit 10(iii)(A) to the Companys Quarterly Report
    on Form 10-Q for the quarterly period ended March 31,
    1998 (File No. 1-1143))
| |  |      |  | (i) |  | Description of the Companys Management
    Incentive Plans (incorporated by reference to the first
    paragraph under Management Incentive Plans and Other
    Arrangements with Officers in the 2004 Proxy Statement)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | (21) |  |     |  | Subsidiaries of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | (23) |  |     |  | Consents of Lawrence B. Cochrane, Robert A. Horn
    and Robert C. Osborne, each as a Qualified Person named in this
    Report pursuant to National Instrument 43-101 issued by the
    Canadian Securities Administrators                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | (24) |  | (a) |  | Powers of Attorney                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |      |  | (b) |  | Resolution of the Board of Directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | (31) |  |     |  | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | (32) |  |     |  | Section 1350 Certifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | (99) |  |     |  | 2004 Proxy Statement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

200



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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in
Toronto, Ontario, on the 15th day of March, 2004.



| |             
| | ------------
| | INCO LIMITED
| | (Registrant)



| |     |                     
| | --- | --------------------
| | By: | /s/ STUART F. FEINER

| |                            
| | ---------------------------
| |                            
| | Stuart F. Feiner           
| | Executive Vice-President,  
| | General Counsel & Secretary

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this Report has been signed
below by the following persons on behalf of the Registrant and
in the capacities indicated on the 15th day of
March, 2004.

|                                             |  |                                                                                            |  |  |  | 
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  |  |  | 
|                                             |  |                                                                                            |  | 
|Signature                                    |  | Title                                                                                      |  | 
|                                             |  |                                                                                            |  | 
|                                            
|/s/ SCOTT M. HANDScott M. Hand               |  | Chairman and Chief Executive Officer
    and Director (Principal Executive Officer)        |  | 
|                                            
|/s/ FAROKH S. HAKIMIFarokh S. Hakimi         |  | Executive Vice-President and
    Chief Financial Officer
    (Principal Financial Officer) |  | 
|                                            
|/s/ RONALD A. LEHTOVAARARonald A. Lehtovaara |  | Vice-President and Comptroller
    (Principal Accounting Officer)                          |  | 

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|                                                                                                                       |  |                                                    |  |  |  | 
|---------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- |  |  |  | 
|                                                                                                                       |  |                                                    |  | 
|Signature                                                                                                              |  | Title                                              |  | 
|                                                                                                                       |  |                                                    |  | 
|                                                                                                                      
|*GLEN A. BARTON(Glen A. Barton)                                                                                        |  | Director                                           |  | 
|                                                                                                                      
|*ANGUS A. BRUNEAU(Angus A. Bruneau)                                                                                    |  | Director                                           |  | 
|                                                                                                                      
|*RONALD C. CAMBRE(Ronald C. Cambre)                                                                                    |  | Director                                           |  | 
|                                                                                                                      
|*JUDITH A. EROLA(Judith A. Erola)                                                                                      |  | Director                                           |  | 
|                                                                                                                      
|*CHAVIVA M. HOSEK(Chaviva M. Hosek)                                                                                    |  | Director                                           |  | 
|                                                                                                                      
|*PETER C. JONES(Peter C. Jones)                                                                                        |  | Director                                           |  | 
|                                                                                                                      
|*JOHN T. MAYBERRY(John T. Mayberry)                                                                                    |  | Director                                           |  | 
|                                                                                                                      
|*DAVID P. OBRIEN(David P. OBrien)                                                                                    |  | Director                                           |  | 
|                                                                                                                      
|*ROGER PHILLIPS(Roger Phillips)                                                                                        |  | Director                                           |  | 
|                                                                                                                      
|*JAMES M. STANFORD(James M. Stanford)                                                                                  |  | Director                                           |  | 
|                                                                                                                      
|*RICHARD M. THOMSON(Richard M. Thomson)                                                                                |  | Director                                           |  | 
|                                                                                                                      
|/s/ EDWARD A. STEENEdward A. Steen
    Inco United States, Inc.
    Park 80 West, Plaza Two
    Saddle Brook, NJ 07663 |  | Authorized Representative in the
    United States |  | 



---



|  |                                                                                                                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Pursuant to powers of attorney executed by the
    directors named above whose names are preceded by an asterisk,
    Stuart F. Feiner, as attorney-in-fact, does hereby sign
    this Report on behalf of each of such directors, in each case in
    the capacity of director, on the 15th day of
    March, 2004.



| |                                   
| | ----------------------------------
| | /s/ STUART F. FEINER              
| |                                   
| | Stuart F. Feiner, attorney-in-fact

202



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CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by
reference in the Prospectuses constituting part of the
Registration Statements on Form S-3 (Nos. 33-22435 and
33-50816), on Form S-8 (Nos. 33-71298, 333-7798, 333-13714
and 333-98601) and on Form F-10 (Nos. 333-13470, 333-12588,
333-104688 and 333-104687) of Inco Limited of our reports dated
February 3, 2004 and March 12, 2004 relating to the
financial statements and the financial statement schedule which
appear in this Annual Report on Form 10-K. We also consent
to the reference to us under the heading Experts in
each of such Prospectuses.

PricewaterhouseCoopers LLP

Chartered Accountants


Toronto, Ontario


March 15, 2004


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INCO LIMITED EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003 Exhibit No.
    
    Exhibit3(ii)(a)
    
    General By-law No. 1 of the Registrant as amended to February
3, 20043(ii)(b)
    
    Standing Resolution of the Registrant as amended to February
3, 200421
    
    Subsidiaries of Inco Limited23
    
    Consent of Independent Accountants23
    
    Consents of Lawrence B. Cochrane, Robert A. Horn and Robert C.
Osborne, each as a Qualified Person under National Instrument
43-10124(a)
    
    Powers of Attorney24(b)
    
    Resolution of the Board of Directors of the Registrant31
    
    Rule 13a-14(a) Certifications32
    
    Section 1350 Certifications99
    
    Proxy Circular and Statement dated February 20, 2004*
   *
    
    Portions of the Proxy Circular and Statement are incorporated by reference in
Part III of this Report.